July 5 2024: China’s central bank has access to hundreds of billions of yuan worth of bonds and will sell them based on market conditions, the bank told Reuters on Friday. This move is seen as an effort to temper a strong bond rally.
The People’s Bank of China (PBOC) plans to borrow medium- and long-term bonds on an open-ended unsecured basis and sell them depending on market conditions. The bank has signed agreements with several major financial institutions regarding bond borrowing, according to the official statement.
These remarks come as China’s sovereign bonds have performed strongly this year, with yields hitting record lows. A shaky economy and volatile stock markets have driven savers to fixed-income safe haven investments.
On Friday, China’s treasury bond futures fell across the board, while bond yields, which move inversely to prices, rose.
Ming Ming, chief economist at CITIC Securities, stated that the comments further clarified the central bank’s strategy of borrowing and then selling treasury bonds. “With the size of the treasury bonds at the central bank’s disposal reaching hundreds of billions of yuan, a single day of concentrated selling will have a significant impact on the market,” Ming said.
Earlier this week, China’s central bank announced plans to borrow treasury bonds from some primary dealers, outlining a strategy aimed at stabilizing domestic interest rates.
The PBOC’s borrowing of treasury bonds will set the stage for potential bond sales, a new tool to help control the flow of credit and market yields. “Without wider monetary tightening, which doesn’t appear to be on the cards, the best the PBOC can probably hope to achieve is to engineer a short-term pause to the bond rally,” said Julian Evans-Pritchard, head of China economics at Capital Economics.
PBOC Governor Pan Gongsheng hinted at the Lujiazui Forum last month that the central bank might soon start trading in the secondary bond market. In May, the central bank indicated it would sell low-risk debt, including government bonds, when necessary, while closely monitoring current bond market changes and potential risks.
Bloomberg News first reported on the PBOC’s bond borrowing agreement.
