In a move to address the soaring rally in government bonds, China’s central bank, the People’s Bank of China (PBOC), announced on Friday that it has secured “hundreds of billions” of yuan in bonds through agreements with major banks. This unprecedented step aims to stabilize the bond market and manage financial risks.
The PBOC’s statement, provided to Bloomberg News, revealed the clearest details yet of its strategy. The central bank has acquired medium- and long-term bonds from several significant financial institutions, allowing it to borrow these securities on an open-ended, unsecured basis and sell them as market conditions dictate.
This announcement follows a Bloomberg report that the PBOC had signed an agreement with Industrial & Commercial Bank of China Ltd. and was negotiating with Postal Savings Bank of China Co. to borrow bonds. This strategy has been in speculation for months, and the central bank’s move aims to counter the surge in sovereign bonds driven by China’s bleak economic outlook and anticipated interest rate cuts.
China’s sovereign bonds have seen a significant rise this year due to a lack of attractive investment alternatives and a shift from savings to financial investments. Despite increased government borrowing to stimulate the economy, demand for bonds has remained high. The PBOC, however, has warned investors about the potential for losses if the market reverses, expressing concerns that excessively low yields could threaten financial stability and negatively impact the yuan.
Benchmark yields bounced back from a record low this week after the PBOC indicated it would borrow bonds from primary dealers, suggesting it might sell these securities to cool the market. This idea was initially brought to attention through an old speech by President Xi Jinping and is viewed as a long-term plan for improved liquidity management in the financial system.
Unlike the Federal Reserve or the Reserve Bank of Australia, which accumulated significant debt before reducing their balance sheets, the PBOC has only purchased a few batches of special sovereign bonds over a decade ago. This has led to concerns about whether the PBOC has enough bonds with the desired maturities to influence the market effectively. Some speculated that the central bank would borrow securities from primary dealers or large banks and sell them, a tactic with little precedent in global central banking.
As of April, the PBOC held about 1.5 trillion yuan ($207 billion) of government debt on its balance sheet. Analysts predict that yields may stabilize as the factors driving demand persist. On Thursday, China’s 10-year yield was around 2.25%, up from an all-time low of 2.18% on Monday, according to Bloomberg data.
Traders will be closely monitoring the outcome of a 30-year government bond auction on Friday to gauge the impact of the PBOC’s borrowing arrangement on investor demand. Additionally, China watchers are preparing for the upcoming Third Plenum, one of the country’s most significant annual policy meetings. Leaders hinted at a “new round of fiscal and tax reform” during an economic meeting in December, raising expectations that further details may be revealed this month.