China’s central bank says it will sell government bonds when necessary
CHINA’S central bank said on Thursday (May 30) it would sell low risk debt including government bonds when necessary, while paying close attention to current bond market changes and potential risks.
The People’s Bank of China (PBOC) made the statement after Reuters sought comment on the scarcity of low-risk assets in China’s financial sector that is obstructing the bank’s plans to return to the treasury bond market after a 17-year hiatus.
“Currently, there is a large demand for risk-free assets in the bond market, and bank deposits are diverted to the bond market due to the expectation of rising bond prices, further expanding the demand for safe assets,” the central bank said.
“The People’s Bank of China is paying close attention to current market changes and potential risks, and will conduct operations on selling low-risk bonds including government bonds when necessary.”
China’s 30-year government bond yield rose around two basis points to 2.54 per cent after the PBOC’s statement.
The PBOC’s comment signalled its concerns over a recent drop in treasury bond yields despite the start of the issuance of one trillion yuan (S$186.6 billion) in ultra-long government bonds this month, analysts and traders said.
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“The repeated warning of risks clearly shows the central bank’s position,” said an investment manager at a brokerage who declined to be named.
“In the future, we need to pay attention to whether the central bank is still mainly shouting reminders to the market or will actually start treasury bond selling operations.”
Taking its cue from an October 2023 speech by President Xi Jinping, the central bank pledged recently to add treasury bond buying and selling to its policy toolkit, to help manage liquidity and interest rate risks.
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But the PBOC’s bond trading, which helps deepen the bond market, faces some near-term obstacles, analysts and policy advisers say, adding that the central bank may have to take small steps to limit the impact on the debt market.
“We cannot rule out the possibility that the PBOC may sell some bonds to drive up market interest rates or give a window guidance to large banks,” said Nie Wen, economist at Hwabao Trust. “But it’s unlikely to tighten policy significantly.”
China has set an economic growth target for 2024 of around 5 per cent, which many analysts say will be a challenge to achieve without much more stimulus.
The PBOC last bought bonds in 2007 for the creation of the sovereign wealth fund China Investment Corp. Its total holdings stand at 1.52 trillion yuan, roughly 3.5 per cent of its total assets. REUTERS
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