Why China’s central bank has suspended bond purchases

BEIJING – China’s central bank suspended purchases of government bonds on Friday in an attempt to slow one-way bond trading that is putting unwanted downward pressure on the yuan, analysts said.

China’s 10-year bond yield hit a record this month, and the Chinese currency traded in Hong Kong on Wednesday at its weakest against the US dollar in more than a year.

The People’s Bank of China is “trying to cool the market by suspending its government bond purchases,” said Larry Hu, Macquarie’s chief China economist.

The decision “suggests that the PBOC is concerned about the recent rapid decline in bond yields, which will increase depreciation pressure on the CNY now and SVB-style financial risk in the future,” Hu said, referring to a major US bank failure in 2023. changes in capital allocation were largely attributed to aggressive rate hikes by the Federal Reserve.

The PBOC he announced before the market opened on Friday halting purchases of government bonds.

The PBOC’s bond buying program did not begin until last year. PBOC Governor Pan Gongsheng said in a high-level speech in June that the central bank would do so gradually. add the buying and selling of government bonds in the secondary market to its monetary policy toolbox.

“The PBOC is trying to signal to all market participants that rates have fallen too low and too fast,” said Peter Alexander, founder of Shanghai-based consultancy Z-Ben Advisors. “Getting out of their favor should lead to an increase in rates at least in the short term.”

“The immediate impact has been a small movement in yields. However, we expect this impact to be relatively short-lived if the PBOC is pausing rather than defending a specific yield target as it did last year; factors pushing bond yields lower such as weak market confidence are sources of yield. it leads to strong demand for safes,” said Lynn Song, LNG’s chief economist.

Limiting stimulus

China is also facing slower economic growth at home. The country stepped up rate cuts and other support in late September after the US Fed’s shift to easier monetary policy.

The fall in bond yields reduced the likelihood that the PBOC could cut interest rates further if needed to further stimulate the economy, said Zong Ke, portfolio manager at Shanghai-based asset manager Wequant.

He said the PBOC’s sudden halt was intended to warn investors against piling on speculatively in the bond rally, exacerbating the fall in yields.

The PBOC attributed its decision to a shortage of bonds, and said it would resume purchases once the supply-demand balance changes.

Capital outflows

Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, noted that the gap between Chinese and US government bond yields has widened, putting pressure on the yuan’s exchange rate.

Compared to the 10-year US Treasury bond yield of 4.68%, the 10-year Chinese government bond yield is around 1.64%. This gap is even bigger than in August Concerns about China’s declining yield increased.

A stronger dollar and higher US Treasury yields make US-denominated assets relatively more attractive to international investors, in theory supporting capital outflows. The greenback has risen on continued expectations of US economic resilience.

“Unusually strong demand for bonds is also likely, driven in part by growing expectations of a major stimulus in 2025 to address weak consumption and deflationary pressures,” said Stansberry Research analyst Brian Tycangco.

“Unfortunately, the suspension of bond purchases will reduce price transparency in the domestic bond market, making it a little more difficult for market participants to execute orders,” he said.

Following the PBOC’s announcement, China’s 10-year government yield was little changed after Friday afternoon. Mainland and Hong Kong stocks were slightly lower.

Supporting the Yuan

China has also recently stepped up its efforts to support the yuan by issuing bills in the Hong Kong market. The PBOC will auction 60 billion yuan of six-month bills in Hong Kong on January 15. The Hong Kong Monetary Authority said on Thursday.

Along with Friday’s bond-buying pause, the PBOC is trying to use a basket of tools to signal the yuan’s stability and help the gradual decline in yields, said Zong Liang, chief researcher at the Bank of China.

The Hong Kong-traded Chinese yuan strengthened slightly on Friday.

Haizhong Chang, corporate executive director of Fitch Bohua, said the PBOC’s move could help longer-term bond yields “return to reasonable levels and also help stabilize the RMB exchange rate.”

— CNBC’s Annie Bao and Ying Shan Lee contributed to this report.