Beijing, July 30, 2024: China’s bond market is experiencing an unprecedented rally, raising questions about whether the central bank will intervene to curb speculative trading or allow the market to continue its upward trajectory to support economic growth. Government bond yields have fallen to record lows, with the benchmark 10-year yield dropping to 2.14%, a level not seen in two decades, and well below expectations of official intervention.
This dramatic decline in yields comes as investors, disheartened by plummeting stock prices, declining property values, and unattractive deposit rates, seek refuge in the safety of government bonds. The People’s Bank of China (PBOC) has been grappling with the decision to either step in and stabilize the market or let the bond rally persist as part of broader economic support measures.
In recent months, the PBOC appeared poised to intervene by selling bonds to manage the market’s overheating. However, last week saw a shift in strategy, with the central bank opting instead to stimulate the economy through interest rate cuts.
Investors are divided on the future course of action. Some anticipate that the PBOC will eventually intervene if the bond rally continues unabated, while others believe there are strong fundamental reasons for the bond market to maintain its upward momentum.
Lynn Song, Greater China Chief Economist at ING Bank, noted, “It’s possible that the PBOC will start to intervene via selling bonds if the rally continues too far, too fast. Still, Chinese bonds may continue to attract buying demand in the near term as investors seek safe sources of yield.”
The concept of the PBOC engaging in bond market operations to manage liquidity and stabilize the financial system has been hinted at in previous statements, including a notable speech by President Xi Jinping. Recently, the PBOC announced it had prepared “hundreds of billions” of yuan in government bonds through agreements with lenders, potentially signaling plans to sell these bonds to temper the rally.
However, analysts caution that aggressive intervention could further strain an already fragile economy. Some believe that additional rate cuts might be necessary if China’s economic performance remains lackluster.
Serena Zhou, Senior China Economist at Mizuho Securities Asia Ltd., remarked, “A low interest environment should help mitigate risks related to the property sector and local debt in the near term. While the PBOC could short sell bonds to cool the rally, it may not be the top priority at the moment.”
The stability of the yuan, which has remained relatively unchanged over the past month despite global currency market volatility, may also be influencing the PBOC’s decision-making process.
On Tuesday, top Communist Party leaders pledged to implement new measures to support economic growth at an appropriate time, according to the official Xinhua News Agency. The Politburo meeting emphasized accelerating the use of funds raised from special bond sales.
China’s upcoming manufacturing data, set to be released Wednesday, may provide further clues on whether additional easing measures are forthcoming. The yield on the most actively traded 10-year government bonds fell for a seventh consecutive session on Tuesday, while futures contracts reached new record highs. According to ING’s Song, the yield could test 2% if the PBOC further cuts rates.
Louise Loo, China Economist at Oxford Economics, observed, “It’s PBOC against markets. Currently, the policy focus seems to be on stabilizing domestic growth, which requires lowering rates as a quick fix to address the downturn.”
