Why China’s central bank has stopped bond purchases

BEIJING – China’s central bank halted its government bond purchases on Friday in a bid to slow one-way bond trading that is putting unwanted downward pressure on the yuan, analysts said.

China’s 10-year bond yield fell to a record low this month, while the Chinese currency traded in Hong Kong on Wednesday hit its weakest against the US dollar in more than a year.

The People’s Bank of China is “trying to cool the market by suspending the government[ernment] bond purchases,” said Larry Hu, chief China economist at Macquarie.

The decision “suggests that the PBOC is concerned about the recent rapid decline in bond yields, as it will increase CNY depreciation pressure now and SVB-style financial risk in the future,” Hu said, referring to the great banking failure of the United States in 2023 which has been largely blamed on changes in capital allocation due to aggressive rate hikes by the Reserve Federal.

U PBOC announced before the open market Friday was stop its purchases of government bonds.

The PBOC’s bond buying program didn’t really start until last year. PBOC Governor Pan Gongsheng said in a high-profile speech in June that the central bank will gradually. add the buying and selling of government bonds on the secondary market to its monetary policy toolbox.

“The PBOC may be trying to signal to all market participants that rates have fallen too low and too fast,” said Peter Alexander, founder of the consulting firm Z-Ben Advisors in Shanghai. “Their departure should lead to a rise in rates at least in the short term.”

“The immediate impact has been a small move to higher yields. However, we expect this impact to be relatively short-lived if the PBOC is simply pausing rather than defending a specific yield target as they did last year past; factors driving lower bond yields such as weak market confidence leading to strong demand for safe yields remain in place,” said Lynn Song, chief economist at LNG.

Threshold stimulus

China is also dealing with slower economic growth at home. The country stepped up rate cuts and other support in late September, following the US Fed’s shift towards easier monetary policy.

Falling bond yields reduced the extent to which the PBOC could further cut interest rates if it needed to further stimulate the economy, said Zong Ke, portfolio manager at asset manager Wequant. based in Shanghai.

He said the PBOC’s sudden shutdown was also intended to warn investors against speculative accumulation in the bond rally, exacerbating the fall in yields.

The PBOC attributed its decision to a shortage of bonds, and said it would resume buying when the balance of supply and demand changes.

The flow of capital

Zhiwei Zhang, president and chief economist of Pinpoint Asset Management, noted that the gap between government bond yields in China and the United States has widened, putting pressure on the yuan exchange rate.

Compared to the 10-year US Treasury bond yield of 4.68%, the 10-year Chinese government bond yield is around 1.64%. That gap is even wider than it was in August, when concerns about falling Chinese yields intensified.

A stronger dollar and higher US Treasury yields make US-denominated assets relatively more attractive to international investors – theoretically supporting capital outflows. The greenback rallied on expectations of continued US economic resilience.

“The unusually high demand for bonds is also likely driven in part by growing expectations of a big stimulus in 2025 to address weak consumption and battling deflationary pressures,” said Stansberry Research analyst Brian Tycangco.

“Unfortunately, the suspension of bond purchases will reduce price transparency in the domestic bond market, making it somewhat more difficult for market participants to execute orders,” he said.

After the PBOC announcement, China’s 10-year government yield was little changed as of Friday afternoon. Mainland and Hong Kong stocks traded slightly lower.

I support the yuan

China has also recently stepped up efforts to support the yuan by issuing bills in the Hong Kong market. The PBOC will sell 60 billion yuan in six-month bills in Hong Kong on January 15. The Hong Kong Monetary Authority said on Thursday.

Taken together with Friday’s bond-buying suspension, the PBOC is trying to use a basket of instruments to signal the yuan’s stability and support a gradual decline in yields, said Zong Liang, chief researcher at the Bank of China.

The Chinese yuan traded in Hong Kong strengthened slightly on Friday.

Haizhong Chang, executive director of corporates at Fitch Bohua, expects the PBOC’s move can help push longer-term bond yields “back to a reasonable level, and also help stabilize the RMB exchange rate” .

— CNBC’s Anniek Bao and Ying Shan Lee contributed to this report.