CHINA’S central bank took the next step towards selling government bonds to cool a record-breaking rally, saying it now has “hundreds of billions” of yuan of the securities at its disposal through agreements with lenders.
After months of investor speculation about its intentions, the People’s Bank of China (PBOC) disclosed the clearest outline yet of its unprecedented plans on Friday (Jul 5).
It said it has hundreds of billions of yuan worth of medium- and long-term bonds at its disposal to borrow, after signing agreements with several major financial institutions. The central bank said it would borrow the bonds on an open-ended unsecured basis and sell them depending on market conditions.
The PBOC’s reply came after Bloomberg reported it had signed an agreement with Industrial & Commercial Bank of China and was in talks with the Postal Savings Bank of China to borrow bonds, according to sources familiar with the situation.
China’s sovereign bonds have surged this year on the back of the country’s gloomy economic outlook and expectations for interest rate cuts. The lack of attractive alternatives and a switch out of savings to financial investments has fanned demand and an increase in government borrowing to boost fiscal stimulus failed to put off buyers.
However, the PBOC has been pushing back against the rally, warning investors of the potential for losses should the market reverse. The central bank sees excessively low yields as endangering financial stability and weighing on the yuan.
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Benchmark yields rebounded from a record low this week after the PBOC said it would borrow bonds from primary dealers, a sign it may be contemplating selling the securities to cool the market.
The idea of the PBOC trading bonds as a potential tool came to the market’s attention via an old speech by President Xi Jinping, although such operations are also seen as a longer-term plan for better liquidity management in the financial system.
But a practical issue quickly became apparent that there may not be enough bonds for the PBOC to sell or at least those with the maturities it wants to guide. Unlike peers such as the Federal Reserve or Reserve Bank of Australia which accumulated sizable amounts of debt before subsequently reducing their balance sheets, the PBOC has only bought a few batches of special sovereign bonds more than a decade ago.
Some speculated that the PBOC would look to borrow securities from primary dealers or big banks and sell them into the market, a move with little precedent in the global central bank playbook. The central bank held about 1.5 trillion yuan (S$279 billion) of government debt on its balance sheet as at April.
Analysts expect that yields may now settle into a range as the fundamentals driving the demand linger. China’s 10-year yield traded around 2.25 per cent on Thursday, up from an all-time low of 2.18 per cent on Monday, according to data compiled by Bloomberg.
Traders will closely watch the results of a 30-year government bond auction on Friday as a test of how the PBOC’s borrowing arrangement impacts investor demand.
China watchers are also preparing for one of the country’s biggest annual policy meetings later this month, the so-called Third Plenum. Leaders at an economic meeting in December said they were contemplating a “new round of fiscal and tax reform”, sparking hopes that details may be unveiled there. BLOOMBERG
