BEIJING — China’s central bank halted government bond purchases on Friday in an attempt to slow down one-way bond trading that puts unnecessary downward pressure on the yuan, analysts said.

China’s 10-year government bond yields fell to record lows this month, while the yuan hit its lowest level against the dollar in more than a year in Hong Kong trading on Wednesday.

Larry Hu, chief China economist at Macquarie, said the People’s Bank of China was “trying to cool the market by suspending government bond purchases.”

Referring to the collapse of major U.S. banks in 2023, Hu Jintao said the decision “shows that the People’s Bank of China is concerned about the recent rapid decline in bond yields, as this will increase depreciation pressure on the yuan now and increase SVB-style financial pressure in the future.” risk”. The main reason is the change in capital allocation caused by the Federal Reserve’s sharp interest rate hike.

this People’s Bank of China Announced before market open on Friday Stop buying government bonds.

The People’s Bank of China’s bond-buying program didn’t begin in earnest until last year. Central Bank Governor Pan Gongsheng said in a high-profile speech in June that the central bank would gradually Incorporate secondary market buying and selling of government bonds into its monetary policy toolbox.

“The People’s Bank of China may be trying to signal to all market participants that interest rates are falling too low, too fast,” said Peter Alexander, founder of Shanghai-based consultancy Z-Ben Advisors. “Their departure should lead to Interest rates are rising, at least in the short term.”

“The immediate impact is for yields to edge slightly higher. However, if the Chinese central bank simply pauses rather than defends a specific yield target as it did last year, then we would expect the impact to be relatively short-lived; Factors driving bond yields lower Lynn, chief economist at LNG Song said substantial demand for safe sources of income remains as a result of weak market confidence.

Limit stimulation

China also faces slowing domestic economic growth. The country stepped up interest rate cuts and other support in late September as the Federal Reserve shifted to loose monetary policy.

Zong Ke, micro-quantification portfolio manager at Shanghai Asset Management, said falling bond yields have reduced the extent to which the People’s Bank of China can cut interest rates further if it needs to further stimulate the economy.

He said the central bank’s sudden halt was also intended to warn investors against speculatively piling into the bond rally, exacerbating the fall in yields.

The People’s Bank of China attributed its decision to a shortage of bonds and said it would resume buying when the supply-demand balance changes.

capital outflow

Zhang Zhiwei, president and chief economist of Pindian Asset Management, pointed out that the widening gap in bond yields between China and the United States has put pressure on the RMB exchange rate.

Compared with the U.S. 10-year Treasury bond yield of 4.68%, China’s 10-year Treasury bond yield is around 1.64%. The gap is even wider than in August, when Worries about falling yields in China grow.

A stronger dollar and rising Treasury yields make dollar-denominated assets relatively more attractive to international investors – theoretically supporting capital outflows. The dollar rose on expectations of continued resilience in the U.S. economy.

Stansberry Research analyst Brian Tycangco said: “The unusually high demand for bonds may also be due to growing expectations for large-scale stimulus measures in 2025 to address consumption weakness and combat deflationary pressures. promoted.”

“Unfortunately, the suspension of bond purchases will reduce the transparency of pricing in the domestic bond market and make it more difficult for market participants to execute orders,” he said.

China’s 10-year government bond yields were little changed as of Friday afternoon following the announcement from the People’s Bank of China. Mainland and Hong Kong stock markets fell slightly.

Support RMB

China has also recently stepped up its efforts to support the yuan by issuing notes in the Hong Kong market. The central bank will auction 60 billion yuan of six-month bills in Hong Kong on January 15 The Hong Kong Monetary Authority said on Thursday.

Zong Liang, chief researcher at the Bank of China, said that combined with the suspension of bond purchases on Friday, the People’s Bank of China is trying to use a basket of tools to send a signal of yuan stability and support a gradual decline in yields.

The yuan strengthened slightly in Hong Kong trading on Friday.

Chang Haizhong, executive director of Fitch Bohua Enterprises, predicts that the central bank’s move will help push long-term bond yields “back to reasonable levels, and will also help stabilize the RMB exchange rate.”

—CNBC’s Anniek Bao and Ying Shan Lee contributed to this report.