China’s central bank made a significant purchase of Rmb400bn ($56bn) in long-term sovereign bonds on Thursday, a move that traders viewed as a potential precursor to directly supporting bond yields in the country’s rapidly expanding debt markets.
The People’s Bank of China (PBoC) acquired Rmb300bn in 10-year notes and Rmb100bn in 15-year notes from primary dealers. These notes had just been issued by the Ministry of Finance to refinance maturing bonds.
Analysts suggest that this action, which effectively removes these bonds from the market, has heightened speculation that the PBoC may soon intervene in the bond market to avert a sharp correction that could lead to financial instability similar to the losses seen with Silicon Valley Bank.
Chinese debt has surged this year as global investors anticipate that Beijing will be compelled to stimulate consumer demand in the world’s second-largest economy.
However, the PBoC has consistently cautioned that declining yields— which rise as prices drop— could incite a liquidity crisis in the banking sector. Earlier this year, the PBoC indicated its readiness to directly engage in market transactions for the first time in decades to prevent a steep decline in long-term yields.
“The PBoC is trying to engineer the yield curve,” said Wei Li, head of multi-asset investment for BNP Paribas in China, noting the significant scale of the purchase. “Now they have a lot more long-term debt on hand because speculators are betting against the central bank,” Li added.
Traders’ anticipation of imminent central bank activity in the sovereign bond market was further fueled by the PBoC’s introduction of a new section on its website titled “notices on the purchase and sale of sovereign bonds.”
Chinese authorities have expressed concerns about the yields on longer-dated debt, as these bonds are essential funding sources for financial institutions like pension funds.
Analysts noted that by purchasing these bonds, the central bank gains the flexibility to sell them at a later date, thereby influencing the prices of 10- to 15-year bonds. Selling long-term debt in the market would result in higher yields.
He Xueqin, an analyst with Guangfa Securities, explained that the newly acquired notes, which mature in 10 to 15 years, will replace previously held notes of the same amount that only had seven-year durations. Currently, the People’s Bank of China (PBoC) holds Rmb1.52tn in government bonds, predominantly with shorter maturities ranging from one to three years.
“The increased holdings of long-term bonds will provide the PBoC with better control over yields, and their approach to managing both short- and long-term yield curves will become more diversified,” He stated.
This year, China’s central bank has implemented various measures to indirectly support sovereign bond yields, including issuing verbal warnings and conducting regulatory inspections. However, investors have continued to purchase bonds, driving the long end of the yield curve to historic lows. The yield on 10-year government bonds fell to 2.12 percent before rebounding to 2.17 percent on Thursday.
Julian Evans-Pritchard, head of China economics at Capital Economics in London, commented, “[Buying the bonds] might seem like an odd move given that the central bank has spent recent months trying to prevent yields from falling. But most signs suggest that it still intends to reduce its government bond holdings rather than increase them.”