The People’s Bank of China (PBOC) has announced a temporary suspension of government bond purchases, aiming to curb investor speculation on weak economic growth. The central bank cited an imbalance in supply and demand for sovereign bonds as the reason for this pause, according to a statement on Friday.
The decision comes at a time when bond yields have fallen to a record low, with investors expecting aggressive monetary easing to tackle economic challenges such as an extended property crisis, weak consumption, and deflation fears. Consequently, China’s currency, the yuan, has come close to record lows offshore.
The move would signal the central bank’s concern over falling bond yields and yuan depreciation, said Ken Cheung, Mizuho Bank’s chief Asian forex strategist. “The yield has already priced in very aggressive monetary easing expectation, while the yuan still faces lingering downside pressure due to a strong US dollar and external trade uncertainties.
The People’s Bank of China has been setting stronger-than-expected daily reference rates for the yuan, and will sell a record amount of bills in Hong Kong in order to drain liquidity and shore up the currency.
Chinese government bond yields rose after the announcement. The five-year yield climbed eight basis points, and the 10-year yield gained four basis points to 1.675%. The offshore yuan gained 0.1% in afternoon trading. The suspension of bond purchases by the PBOC comes in the wake of the central bank’s 2023 policy framework overhaul, after adding government bond trading to its liquidity management toolkit. Analysts said, however, that the suspension should not be a long one, as policymakers try to reinforce growth with accommodative monetary policies.
Going forward, the PBOC may use short-term bonds to steer bank deposit rates lower rather than intervene across the curve.
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Source: Moneycontrol
News Desk
