(Bloomberg) — China’s central bank has set up a new bond trading section on its website, fueling speculation that it could soon begin buying and selling government bonds.
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Late Wednesday, the People’s Bank of China added a section for explanations of “buying and selling government bonds” to a webpage about its open market operations. Since then, various theories have emerged about the central bank’s intentions — some say it may soon sell some of its holdings to slow the bond rally, while others argue it will buy debt from lenders that participated in a private auction.
“This move means that the PBoC sees a good opportunity to start buying and selling government bonds on a regular basis in the open market and improve the coordination of monetary and fiscal policies,” said Ming Ming, chief economist at Citic Securities Co. “This move can benefit the real economy.”
Bond traders have been waiting since March to see when and if the PBoC will start trading government bonds, after President Xi Jinping in an earlier speech described such an operation as a possible tool to manage liquidity. In July, the central bank said it had “hundreds of billions” of yuan worth of securities available through agreements with lenders – a sign it was willing to sell them to curb the bull run. But further policy guidance on the matter has been scarce.
At least until mid-August, the PBoC had a greater chance of selling bonds as a rapid rise in government debt prompted authorities to initiate stress tests on financial institutions to limit risks and prompted them to issue stark verbal warnings to speculators.
Last week, however, China’s finance ministry said the PBoC could conduct open market operations with the banks involved, which participated in private rollover auctions of special bonds on Thursday. In this case, the central bank could buy the bonds to minimize the impact on market liquidity. It has taken similar steps at least in 2022 and 2017.
Whatever the PBoC does, the speculation underscores vigilance over regulatory action amid volatility in the bond market. Yields fell to record lows earlier this month as investors bought government bonds amid signs of an economic slowdown, before rallying amid fears of an official crackdown on the rally.
Over the weekend, Bloomberg News reported that the central bank sees risks in a buying spree in the securities and believes a prolonged decline in long-term yields is unsustainable. However, it has not sought to ban legal investment or trading in its government bonds, nor will it do so, people familiar with the PBoC’s thinking said.
The yield on 10-year government bonds rose one basis point to 2.16 percent on Thursday, somewhat offsetting its decline in the previous session.
“The PBoC is trying to send a policy signal to the market that it wants more policy transparency,” said Gary Ng, senior economist at Natixis SA. “This lays the groundwork for future trading in government bonds.”
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