China central bank to maintain yield curve, correct bond risks: state media

CHINA’S central bank is determined to maintain a normal upward-sloping yield curve and correct bond-market risks, the bank-backed Financial News reported late on Friday (Jul 12), citing industry sources and experts.

The report is the latest warning to the country’s bond market after the People’s Bank of China (PBOC) sounded concerns and introduced plans to sell treasury bonds to cool a bond rally.

“The bond market won’t rise forever, and there is a growing risk of a reversal in the current market,” the newspaper quoted an unnamed industry source as saying.

The official media added that some rural commercial banks, which have higher risks than their bigger peers, have an overweight position on medium and long-term treasury bonds.

Extending investment durations enables financial institutions to pursue higher returns. But sharp rises in interest rates against the backdrop of such a maturity mismatch will cause losses.

“Bearing large losses (from bond investments) will hit the bottom line of capital and amplify their interest-rate risks and credit risks,” the industry source said.

PBOC governor Pan Gongsheng said last month that China must address the kind of risks that led to the collapse of the US Silicon Valley Bank last year.

The PBOC told Reuters last week it had hundreds of billions of yuan worth of bonds at its disposal to borrow, and would sell them depending on market conditions, part of a plan markets see as an effort to cool a powerful bond rally.

“The borrowing and selling of treasury bonds will help to balance market supply and demand and prevent risks in the bond market,” the official newspaper said, citing an expert.

“There is no need for the market to worry about the impact of the sale of treasury bonds on liquidity. The central bank’s stance of maintaining reasonably ample liquidity conditions has not changed.” REUTERS