The People’s Bank of China on Friday, January 10, announced that it had suspended the purchase of treasury bonds, against which a jump in yields was recorded and rumors began to actively circulate that this decision by the Asian country’s financial regulator was aimed at protecting the yuan, which is currently on a trajectory of consistent weakening.
The сentral bank of China, as part of the mentioned statement, noted that the reason for its decision was a shortage of bonds. It is worth noting that the purchase of debt securities was part of a set of actions by the Asian country’s financial regulator aimed at providing conditions for the implementation of a campaign to ease its monetary policy.
It is worth noting that the People’s Bank of China announced its decision at a time when there was a sharp sell-off in other major bond markets. According to media reports, referring to analysts, these actions of the financial regulator of the Asian country indicate its desire to ensure a simultaneous increase in profitability in the domestic market.
Yields, which vary inversely with bond prices, showed a sharp increase following Friday’s statement from the People’s Bank of China. The yield on the Asian country’s 30-year treasury bonds rose by five basis points in early trading. At the same time, the yield on 10-year bonds showed an increase of 4 basis points. It is worth noting that recently both mentioned indicators have had negative dynamics. The yield of the specified bonds at a certain point fell to readings, which are record lows.
It is also worth noting that against the background of the statement of the People’s Bank of China, the strengthening of the yuan was recorded. In this case, there was a moderate increase.
Ken Cheung, chief Asian FX strategist at Mizuho Bank, said that one of the reasons for the yuan’s depreciation is the increased gap in yields between the United States and China.
It’s worth noting that Friday’s announcement of the Asian country’s financial results was unexpected news. In the context of this statement, it is noteworthy that. that the People’s Bank of China started buying bonds just a few months ago. Starting the appropriate actions, the financial regulator of the Asian country stated that in this case, its goal is to improve liquidity management.
The People’s Bank of China also said in a statement that it would resume bond purchases through open market operations. In this case, it was also separately outlined that the financial institution would take appropriate action at the appropriate time, depending on supply and demand in the government bond market.
Moreover, it’s worth noting that Friday’s statement by the central bank of the Asian country was made after its warnings about the risks of bond market bubbles. In the mentioned market, long-term bond yields have fallen to a record low. The corresponding dynamic is related to the fact that investors are looking for safe assets against the backdrop of an unstable economy and hope for further monetary policy easing.
It’s worth noting that bond prices in China have reached such a high which can be called a 10-year rise. The corresponding dynamic started about two years ago. In this case, the impact factor was the fact that, against the background of the crisis in the Asian real estate sector and the weakness of the stock market, there was an influx of funds into bank deposits and the debt market.
At the same time, rising bond prices caused the yield on 30-year debt securities to drop to 1.8%. In this case, there is a kind of reflection of the so-called bearish view of the economy, the widening of the Chinese rate discount to the US, and increased devaluation pressure on the yuan. Currently, the exchange rate of the national currency of the Asian country is at a 16-month low. The yuan also fell by 5% compared to its September peak.
Huang Xuefeng, research director at Shanghai Anfang Private Fund Co in Shanghai, expects the downward trend in Chinese bonds to continue. According to the expert, the implementation of the corresponding scenario is realistic, as the market continues to face a shortage of assets. Within this state of affairs, there is a shortage of good investment opportunities.
Yu Yangyu at Guangdong Shunde Rural Commercial Bank Co. said in a webinar to investors that as the yuan’s exchange rate is under pressure and at the same time bond yields are rapidly declining, the central bank of China felt the need to maintain sentiment in the debt securities market.
The media of the Asian country also noted on Friday that the market should not overly rely on the fact that the financial regulator will decide to ease monetary policy in the foreseeable future.
It is worth noting that, in general, the Chinese economic system, which is the second largest in the world, is currently going through a difficult period. In this case, it is worth mentioning such factors of the present reality configuration in the Asian economy as the prolonged crisis in the real estate sector, which contains risks of negative fundamental changes, sluggish domestic consumer activity, and falling investor confidence. At the same time, Chinese exports are showing growth, and is a positive fact, contrasting with the mentioned list of difficulties Beijing faces. At the same time, external shipments from an Asian country have some alarming prospects. In this case, it implies the intention of Donald Trump, who won the United States presidential election in November and will return to the White House in January, to raise tariffs on imported goods. The potential implementation of the mentioned plan will have significant implications for Chinese exports, which are currently the main driving force behind the growth of the Asian country’s economy.
As we have reported earlier, China Orders Miners to Report More of Their Overseas Reserves.
