BEIJING — China Takes Action to Stabilize Bond Market and Yuan
The Chinese central bank, known as the People’s Bank of China (PBOC), announced on Friday that it would halt its purchases of government bonds. This decision was made to temper the rapid decline in bond yields, which had been causing undue downward pressure on the Chinese yuan. Analysts suggest that the PBOC’s move is an attempt to manage the situation, preventing further depreciation of the yuan and minimizing potential financial risks.
In recent weeks, China’s 10-year bond yield has hit an all-time low, while the yuan weakened significantly against the US dollar in Hong Kong, reaching its weakest point in over a year. By suspending its bond buying, the PBOC aims to cool down the market’s excessive enthusiasm for government bonds and stabilize financial conditions.
Larry Hu, chief China economist at Macquarie, stated, “The PBOC is trying to cool down the market by suspending government bond buying.” He further explained that the central bank is concerned about the rapid decline in bond yields, as it increases the pressure on the yuan’s depreciation and raises concerns about financial stability similar to what happened with the failure of Silicon Valley Bank in 2023.
The PBOC’s Recent Bond Buying Program
The PBOC’s bond buying program was initiated last year. Governor Pan Gongsheng disclosed in a prominent speech in June that the central bank was adding the trading of government bonds on the secondary market as an additional monetary policy tool. By halting its purchases, the PBOC may be signaling to investors that yields have fallen too sharply too quickly.
“Their stepping away should lead to a rise in yields, at least in the short term,” said Peter Alexander, founder of Shanghai-based Z-Ben Advisors. However, Lynn Song, chief economist at LNG, anticipates that the impact of this measure will be relatively short-lived unless the PBOC sets a specific yield target, as the underlying factors driving the drop in yields, including low market confidence, remain unchanged.
Limiting Stimulus Measures
China is currently facing slower economic growth at home, leading it to implement rate cuts and other stimulus measures in late September. The fall in bond yields limits the PBOC’s ability to reduce interest rates further if additional stimulation is required. Zong Ke, portfolio manager at Shanghai-based asset manager Wequant, believes the PBOC’s sudden halt is also intended to warn against speculative investment in bonds.
The PBOC attributed its decision to a temporary shortage of bonds and pledged to resume purchases when supply and demand in the market stabilize.
Capital Outflows and Yuan Pressure
The widening gap between government bond yields in China and the US, with the Chinese yield at around 1.64% compared to the US Treasury 10-year bond yield of 4.68%, is putting immense pressure on the yuan exchange rate. This disparity makes US-denominated assets more attractive to international investors, potentially driving capital outflows.
“The unusually high demand for bonds is partly driven by expectations of a large stimulus package in 2025 aimed at boosting weak consumption and countering deflationary pressures,” said Brian Tycangco, an analyst at Stansberry Research. However, Brian also noted that suspending bond purchases could reduce transparency in the domestic bond market, making it harder for market participants to execute trades.
As of Friday afternoon, the yield on China’s 10-year government bond showed minimal change, and both mainland and Hong Kong stocks traded slightly lower.
Supporting the Yuan
Through this latest move, the PBOC is attempting to use various tools to signal yuan stability and support a gradual decline in yields. Zong Liang, chief researcher at the Bank of China, believes that the PBOC’s actions could help return longer-term bond yields to reasonable levels and stabilize the yuan’s exchange rate.
The yuan in Hong Kong saw a slight strengthening on Friday, reflecting some market sentiment that the PBOC’s measures are effective.
Haizhong Chang, executive director of corporates at Fitch Bohua, anticipates that the PBOC’s move will help stabilize both bond yields and the RMB exchange rate.
In conclusion, the PBOC’s decision to halt government bond purchases is a strategic move to manage market volatility and safeguard China’s financial stability. It reflects the complex interplay between domestic monetary policy, global economic dynamics, and market psychology.
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