Why did China’s central bank stop buying bonds?

BEIJING – China’s central bank halted purchases of government bonds on Friday in a bid to slow one-way bond trading that has put unwanted downward pressure on the yuan, analysts said.

China’s 10-year bond yield fell to its lowest level this month, while the Hong Kong-traded Chinese currency hit its weakest against the U.S. dollar in more than a year on Wednesday.

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

The decision “will cause the PBOC to worry about the rapid decline in bond yields in the near future, as it will increase the pressure of CNY depreciation now and the financial risk of the SVB in the future,” Hu said, citing a major US bank failure in 2023, which he blamed mainly on the change in capital allocation due to the Federal Reserve’s rate hikes.

The PBOC announced before the market opened on Friday Stop government bond purchases.

The PBOC’s bond buying program did not begin until last year. PBOC Governor Pan Gongsheng said in a keynote speech in June that the central bank would proceed gradually. Add buying and selling of government bonds in the secondary market to the monetary policy toolbox.

“The PBOC may be trying to show all market participants that rate cuts are too low and too fast,” said Peter Alexander, a consultant at Shanghai-based ZBen Advisors. “Their withdrawal should at least bring a short-term increase in prices.”

“The immediate impact is slightly higher yield activity. However, if the PBOC pauses rather than defends a certain yield target as they did last year, we expect this impact to be relatively short-lived, bond yields will be lower. As weak market confidence leads to higher demand for safe sources of yield The lead is still on,” said Lin Song, LNG’s chief economist.

Stimulus restriction

China is experiencing slow economic growth domestically. The country stepped up rate cuts and other support in late September following the US Fed’s move to easy monetary policy.

The decline in bond yields reduced the extent to which the PBOC could cut interest rates further if needed to further stimulate the economy, said Zhong Ke, portfolio manager at Shanghai-based asset manager WeQuant.

He said the PBOC’s sudden stop was intended to warn investors against piling on to the speculative bond rally, which could exacerbate the yield decline.

The PBOC said the reason for the decision was a shortage of bonds and would resume purchases as the supply-demand balance shifts.

Capital is released

Zwei Zhang, president and chief economist of Pinpoint Asset Management, noted that the widening gap between Chinese and US government bond yields has put pressure on the yuan’s exchange rate.

Compared to the US Treasury 10-year bond yield of 4.68%, the Chinese government 10-year bond yield is around 1.64%. That gap is wider than it was in August, when fears of a fall in Chinese output rose.

A stronger dollar and higher U.S. Treasury yields make U.S.-denominated assets relatively more attractive to international investors — in theory supporting capital inflows. The greenback rose on expectations of continued US economic resilience.

Stansbury Research analyst Brian Taikangko said: “Bond demand is likely to be driven by unusually strong growth in 2025, with expectations of a big stimulus to offset weak consumption and recessionary pressures.”

Unfortunately, halting bond purchases reduces pricing transparency in the domestic bond market, making it a bit more difficult for market participants to execute orders.

After the PBOC’s announcement, yields on China’s 10-year government were little changed as of Friday afternoon. Mainland and Hong Kong stocks were trading slightly lower.

Support the yuan

China has recently stepped up efforts to support the yuan by issuing bills in the Hong Kong market. PBOC will auction 60 billion yuan in six-month bills in Hong Kong on January 15. Hong Kong’s monetary authority said Thursday..

Coupled with Friday’s bond-buying ban, the PBOC is trying to signal yuan stability and use a basket of tools to support gradual yield cuts, Bank of China chief researcher Zhong Liang said.

The Chinese yuan, traded in Hong Kong, strengthened slightly on Friday.

Heizhong Chang, corporate executive at Fitch Bohua, expects the PBOC’s move to “help bring long-term bond yields back to a reasonable level and stabilize the RMB exchange rate.”

— CNBC’s Annick Bao and Ying Shan Li contributed to this report.