China’s securities regulator has directed several domestic brokerages to scrutinize their bond trading activities as authorities seek to curb the excessive buying of Chinese government bonds, according to sources familiar with the matter.
The brokerages have been instructed to conduct comprehensive compliance checks across all aspects of their bond trading operations, said the sources, two of whom had direct knowledge of the instructions. These individuals requested anonymity as they were not authorized to speak to the media. The China Securities Regulatory Commission (CSRC) did not immediately respond to a Reuters request for comment.
China’s economy, struggling with a prolonged property crisis, has prompted investors to flee the volatile stock market and shift towards the bond market, as banks continue to reduce deposit rates. This shift has seen a surge in bond investments from large banks, insurers, mutual funds, and rural financial institutions.
The central bank has issued multiple warnings against reckless bond buying, concerned about the risk of a bubble that could lead to a crisis similar to that of Silicon Valley Bank.
In addition to ordering compliance checks, the CSRC has recently taken other steps to cool the bond market rally. It has asked major mutual fund companies to limit the duration of new bond funds to two years, and the central bank has required some financial institutions to report daily changes in their long-term treasury bond positions.
This week, large state banks sold substantial volumes of Chinese government bonds, an action intended to help increase yields, according to industry trading data and market participants.
Regulators are taking comprehensive measures against bond market misconduct, said one source familiar with the CSRC’s latest instructions. The compliance checks are partly focused on four rural commercial banks under investigation for suspected bond market manipulation. These banks, identified by the National Association of Financial Market Institutional Investors, include Changshu Rural Commercial Bank, Kunshan Rural Commercial Bank, Jiangsu Suzhou Rural Commercial Bank Co, and Jiangnan Rural Commercial Bank, all located in Jiangsu province in eastern China.
The bond market rally began gaining momentum late last year. This week, China’s 10-year and 30-year government bond futures reached record levels before retreating. The 10-year bonds have increased by 3% this year, while 30-year bonds have surged by 10%. On Monday, 30-year treasury yields hit a record low of 2.29%, down 53 basis points since the end of 2023.
