REGULATORS told commercial banks in China’s Jiangxi province not to settle their purchases of government bonds, taking some of the most extreme measures yet to cool a market rally that has alarmed Beijing.
Several rural banks failed to settle their transactions on Monday (Aug 12) after regulator guidance to halt purchases late on Friday, said people familiar with the matter, asking not to be named discussing private information.
While reneging on trades is one way to prevent banks from taking excessive bond risk, the practice could undermine market integrity if counterparties worry that more transactions will fail.
The episode underscores the challenge Chinese regulators face as they try to maintain financial stability in the face of relentless demand for bonds. In one sign of how authorities are struggling to strike the right balance, the Jiangxi officials at one point rescinded their order before it was eventually reinstated, people familiar with the matter said.
Jiangxi is an inland province bordering Guangdong in the south and Fujian to the east.
Bond yields in China have been hitting new lows for months amid economic pessimism and bets on interest rate cuts, prompting the government to resort to a slew of administrative steps to guide markets. Now the effect is trickling down to China’s rural lenders, which were among the most aggressive buyers of government bonds this year.
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Authorities have widened their battle against bond speculators in recent weeks, targeting everything from fund houses to rural banks, in a bid to push government yields higher from record lows.
At least four Chinese brokerages have started fresh measures to cut back trading of government bonds beginning last week, people with knowledge said, with one saying the change followed guidance from authorities.
Regulators also asked some of the nation’s largest state banks to note down a record of the buyers of the sovereign notes they sold, in a subtle sign of more efforts to cool the rally.
While the PBOC has so far stopped short of its pledge to borrow government bonds and sell them directly in the market, some state lenders unexpectedly sold seven-year bonds and 10-year notes earlier this month to push up yields.
Among other tactics in Beijing’s playbook, regulators were reported to have slowed the approval for new bond funds. Local authorities in eastern Jiangsu, one of the most affluent provinces asked some rural lenders to suspend trading in sovereign notes.
The benchmark 10-year yield climbed four basis points on Monday to 2.24 per cent, the highest level in three weeks. The trading volume for the most active 10-year government bond fell to 77 billion yuan (S$14.2 billion) on Friday, just 45 per cent of last week’s high reached on Tuesday, according to data from the China Foreign Exchange Trade System. BLOOMBERG
