Finance & Economics

China’s Central Bank to Borrow Treasury Bonds From Primary Market

On Monday, July 1, the People’s Bank of China announced its intention to borrow treasury bonds from some traders in the primary market shortly.

China’s Central Bank to Borrow Treasury Bonds From Primary Market

The financial regulator of the Asian country stated that the mentioned practice of actions, the implementation of which is planned for the near future, will help maintain the stable functioning of the bond market. A statement was released on the website of the central bank of China, which notes that the specified decision was adopted after reviews and assessment. In this case, the value of the bonds is not specified. Also, the financial regulator of the Asian country did not provide information on maturity dates in a message published on its website.

It is worth noting that the decision announced by the People’s Bank of China on Monday does not belong to the category of practices that are typical or standard for this institution. The media notes that the financial regulator of the Asian country has resorted to ultra-long treasury bonds as a way to finance the implementation of projects in the construction area. The bonds were issued in batches for 30 and 50-year terms. It should also be noted that the Chinese construction sector is currently in the condition of a deep crisis, which turned out to be excessively prolonged compared to preliminary expectations regarding this process and has become a factor of pressure on the economic system of the Asian country, constraining its growth opportunities.

In October, at a central financial work conference, the President of the People’s Republic of China Xi Jinping gave several instructions. Following the mentioned instructions, the central bank of the Asian country is ready to use treasury bond trading on the secondary market as a tool to adjust market liquidity and improve China’s yield curve, which is a graphical representation of interest rates on debt for a range of maturities.

Over the past three months, the financial regulator of the Asian country has repeatedly expressed concern about the decline in yields of ultra-long-term treasury bonds. In the context of the appropriate issue, officials of the People’s Bank of China note that the mentioned tendency does not correspond to the growth potential of the state’s economy.

Last week, the yield on the Asian country’s 50-year government bonds fell below the 2.5% mark, which is the minimum threshold that the financial authorities will have to defend, including as part of the implementation of the practice of actions involving the sale of treasury bonds.

Liu Shengjun, head of the Shanghai-based China Financial Reform Research Institute, commenting on the central bank’s intention, which was announced on Monday, said that this is a kind of innovative way to inject market liquidity. The expert also described the mentioned intention as a structural tool for solving specific problems in the interbank market.

Ming Ming, chief economist at Citic Securities, says that the move announced on Monday by the People’s Bank of China suggests that monetary authorities may sell borrowed bonds on the secondary market very soon.

The downward dynamic of the Asian country’s bond yields against the background of an increase in a similar indicator in the United States provokes an outflow of capital from China. This tendency is also a factor of pressure on the yuan exchange rate.

The yield on China’s 10-year treasury bonds at the end of November 2017 was fixed at a record high of 4.0059%. Since then, the corresponding indicator has been on a downward trajectory most of the time. On Monday, the yield on the Asian country’s 10-year treasury bonds was fixed at 2.184%, which is almost a 10-year low. For example, last week in the United States, this figure was 4.36%. It is worth noting that since the beginning of 2020, when the coronavirus pandemic began, the yield of 10-year US bonds has been on an upward trajectory most of the time.

In June, during a speech at a forum in Lujiazui Shanghai, People’s Bank of China governor Pan Gongsheng said that the Asian country’s financial regulator should learn the lesson of Silicon Valley Bank and take immediate measures aimed at reducing the accumulation of risks in domestic financial markets. In the relevant context, he noted that the monetary authorities should pay special attention to the mismatch in maturity and interest rate risk of some non-banking entities, which currently hold a large amount of medium- and long-term bonds. Pan Gongsheng said that the financial regulator needs to maintain an upward-sloping yield curve.

Last week, during the quarterly monetary policy meeting, the People’s Bank of China announced its intention to pay attention to changes in long-term bond yields.

On Monday, the most active futures for 30-year government bonds traded in Shanghai fell by 1.06%. At the same time, futures for 10-year bonds showed a decrease of 0.37%.

In 2007, the Asian country’s financial regulator bought bonds to create the sovereign wealth fund China Investment Corp. Currently, the People’s Bank of China holds bonds worth 1.52 trillion yuan ($209.14 billion). This figure is equivalent to about 5% of the treasury bonds in circulation and 1.4% of all local bonds worth $14.6 trillion held by entities in the Asian country.

Xing Zhaopeng, senior China strategist at ANZ, says that when the central bank of the mentioned state starts selling, these actions will increase the volume of treasury bonds in circulation on the market, which means activating a larger supply. The expert also said that the move of the Asian country’s financial regulator will set a bottom line for treasury yields.

As we have reported earlier, China’s Central Bank Leaves Key Rate Unchanged.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.