China's central bank has halted its bond buying.
- This month, China's 10-year bond yield reached a record low, while the Chinese currency in Hong Kong traded at its weakest against the U.S. dollar in over a year.
- Larry Hu, chief China economist at Macquarie, stated that the People's Bank of China is attempting to calm the market by temporarily halting government bond purchases.
The Chinese central bank stopped purchasing government bonds on Friday in an effort to curb the one-sided trade of bonds that has negatively influenced the yuan, according to analysts.
This month, China's 10-year bond yield reached a record low, while the Chinese currency in Hong Kong traded at its weakest against the U.S. dollar in over a year.
Larry Hu, chief China economist at Macquarie, stated that the People's Bank of China is attempting to calm the market by temporarily halting government bond purchases.
Hu stated that the PBOC's decision implies concern over the decline in bond yields, which will increase CNY depreciation pressure and pose financial risks similar to SVB in the future.
The PBOC declared before the market opened on Friday that it would stop purchasing government bonds.
The PBOC's bond buying program commenced last year, as announced by PBOC Governor Pan Gongsheng in a June speech.
"According to Peter Alexander, founder of Z-Ben Advisors, the PBOC may be signaling to market participants that rates have come down too quickly, which could lead to a short-term rise in rates."
LNG's chief economist, Lynn Song, stated that the immediate impact of the PBOC's move has been a slight increase in yields. However, she expects this impact to be short-lived if the PBOC is only pausing rather than defending a specific yield target as they did last year. The factors driving bond yields lower, such as weak market confidence leading to heavy demand for safe sources of yield, remain in place.
Limiting stimulus
In addition to slower economic growth, China has increased its rate cuts and other support measures in response to the U.S. Fed's shift towards easier monetary policy in late September.
The reduction in bond yields limited the PBOC's ability to lower interest rates to stimulate the economy, according to Zong Ke, a portfolio manager at Wequant in Shanghai.
The PBOC's sudden halt was intended to caution investors against speculatively increasing their bond investments, which could further decrease yields.
The PBOC explained its decision to pause bond purchases due to a shortage of bonds, and stated that it would resume purchases when the supply-demand balance shifted.
Capital outflows
The widening gap between government bond yields in China and the U.S. is putting pressure on the yuan exchange rate, according to Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.
The gap between the yield on the Chinese government 10-year bond and the U.S. Treasury 10-year bond yield has widened since August, with the Chinese yield currently standing at 1.64% compared to the U.S. yield of 4.68%.
The greenback has risen on anticipation of the U.S. economy's continued strength.
According to Brian Tycangco, an analyst at Stansberry Research, the high demand for bonds is also likely being fueled by growing expectations of a significant stimulus package in 2025 to address weak consumption and combat deflationary pressures.
He stated that suspending bond purchases would decrease the clarity of pricing in the domestic bond market, making it slightly more challenging for market participants to execute orders.
Despite the PBOC announcement, China's 10-year government yield remained relatively stable, while mainland and Hong Kong stocks experienced slight declines.
Supporting the yuan
The PBOC will auction 60 billion yuan in six-month bills in Hong Kong on Jan. 15, as China has recently intensified its efforts to support the yuan by issuing bills in the Hong Kong market.
The PBOC is employing a range of tools to maintain yuan stability and encourage a moderate decrease in yields, as indicated by Zong Liang, chief researcher at the Bank of China.
The Chinese yuan traded in Hong Kong strengthened slightly on Friday.
Fitch Bohua's executive director of corporates, Haizhong Chang, believes that the PBOC's move will help bring yields of long-term bonds back to a reasonable level and stabilize the RMB exchange rate.
— CNBC's Anniek Bao and Ying Shan Lee contributed to this report.
China Economy
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