CHINA’S central bank said it will suspend buying government bonds, its latest attempt to temper investor bets on weak economic growth that have undermined the currency and sapped confidence among businesses and consumers.
The People’s Bank of China (PBOC) will suspend purchases of sovereign debt this month as the supply of the bonds has fallen short of demand, it said on Friday (Jan 10). The central bank will pick a time to resume buying depending on market conditions, it added.
Benchmark bond yields had slumped to an all-time low, driven by bets on aggressive policy easing to reignite a sluggish economy and demand for haven assets. Investors have turned to bonds amid a prolonged property crisis, weak consumption and concerns over deflation. China’s currency has fallen towards a record low offshore.
The move reflects “the authorities’ discomfort with plummeting government bond yields and increasing yuan depreciation pressure”, said Ken Cheung, chief Asian foreign-exchange strategist at Mizuho Bank. “The yield level should already have aggressive pricing of PBOC easing this year, while the yuan will remain under pressure on a firm US dollar and tariff threats.”
The PBOC overhauled its policy framework last year and added government bond trading as a tool to manage liquidity in the economy, a step to make it operate more like global peers. But its use of the tool has been challenged by the bond rally, a problem for the PBOC due to concerns over financial risks and the pessimistic signal it sends on the outlook for growth.
Bond investors have never been so bearish about the world’s second-largest economy, with some now piling into bets on a deflationary spiral. The contrast with the US is stark, where Treasury yields are climbing higher by the day, powered by seemingly unstoppable economic growth stateside.
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That’s a dynamic that favours the US dollar and the yuan has fallen to trade near the weak edge of its permitted band versus the US currency, despite efforts by authorities to stabilise the exchange rate.
“This marks another move by the PBOC to support the yuan FX rate,” said Serena Zhou, an economist with Mizuho Securities Asia.
On Friday, the PBOC issued yet another daily reference rate for the managed currency that was significantly stronger than the market’s forecast. It also plans to issue a record amount of bills in Hong Kong this month to soak up liquidity and support the yuan.
Aggressive easing
The statement may cool down speculation on aggressive monetary easing that emerged since top leaders pledged “moderately loose” monetary policy in December, a term unseen in 14 years. Bank of America estimated the PBOC would purchase a net three trillion yuan (S$560 billion) of government bonds this year as a supplementary policy tool.
Signals from China’s money markets already suggested some traders are betting that authorities will delay easing measures in order to support the beleaguered currency.
China government bond yields rose across the curve following the announcement, with the five-year rate climbing as much as eight basis points and the 10-year rate gaining four basis points to 1.675 per cent. The offshore yuan edged 0.1 per cent higher.
The PBOC has purchased a net one trillion yuan of sovereign notes for five straight months through December, after starting regular bond transactions with primary dealers in August. The benchmark 10-year yield hit a record low 1.6 per cent earlier this week.
For Lynn Song, chief greater China economist at ING Bank in Hong Kong, the move looks like a short-term reaction to market conditions rather than a policy shift. He still expects an interest rate cut or other easing measures in the first quarter.
“The bond market has been quite well supported with demand recently, so there does not seem to be too strong of a case for additional PBOC purchases at the moment,” he said. “The announcement should result in yields moving a little higher in the near-term and could also offer a little support for the yuan as well.” BLOOMBERG
