CHINA’S financial regulator asked some rural lenders to shorten the average duration of their bond holdings, according to sources familiar with the matter, as authorities seek to safeguard the banking sector amid a relentless rally in the debt market.
Local branches of the National Financial Regulatory Administration (NFRA) looked into banks’ bond investments among other things during their monthly checks, said the sources, who asked not to be identified as the matter has not been made public. The move followed a similar request made by the central bank, the sources said.
Last week, the People’s Bank of China (PBOC) said it has “hundreds of billions” of yuan of securities at its disposal to sell in order to cool the rally. The bond surge has been fanned by concern over the world’s second-largest economy and a lack of alternative investment opportunities onshore and has shrugged off an increase in sovereign debt sales.
The slump in yields has become a cause of concern for policymakers who fear a possible bubble forming in the market and losses for investors should they rebound sharply in the future.
PBOC governor Pan Gongsheng said in June the central bank is monitoring bond investments by non-bank financial institutions closely as those who hold large amounts of medium- to long-term bonds could face interest-rate risks. Duration is a measure of the sensitivity of a bond to changes in interest rates.
Central banks should learn a lesson from the collapse of the Silicon Valley Bank and correct any increase in financial market risks in a timely fashion, he said. The NFRA did not immediately reply to a request for comment. BLOOMBERG
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