(Bloomberg) — Chinese traders are paying a premium for government bonds to evade regulators seeking to tame an unprecedented rally, people familiar with the matter said.
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Traders from non-bank financial firms, including insurers, are specifying in their orders to brokers that they don’t want to buy from any of the big state banks since regulators have told the nation’s largest lenders to keep records of their counterparties, according to the people, who asked not to be named discussing a private matter.
Investors are seeking out mainly 7- and 10-year notes and willing to pay above the asking price of big banks, as reflected in lower yields of 0.1 basis points to 0.25 basis points, two of the people said. The impact on the market isn’t clear yet.
The development runs counter to Beijing’s efforts to rein in a record-breaking rally amid concerns over financial stability. It shows the difficulties regulators face in containing demand for bonds as the economy sputters and investors seek a safe place to park their money. It also indicates how efforts to control the market can inadvertently lead to price distortions and hamper trading.
In a sign of heightened scrutiny, China vowed to resolutely crack down on illegal activities that disrupt order in the bond market, according to a commentary published Wednesday by the central bank-backed Financial News. Some institutions’ quoted prices were significantly higher than market levels, the outlet said.
Beijing has successively widened its crackdown on bond speculators, targeting everything from fund houses to rural banks, to pull up government yields higher from record lows.
Regulators even told rural banks in China’s Jiangxi province not to settle their purchases of government bonds in an unusual move, Bloomberg reported. Earlier, local authorities in eastern Jiangsu, one of China’s most affluent provinces, also asked some rural lenders to suspend trading in sovereign notes.
Authorities have slowed the approval for new bond funds, while some brokerages cut back trading of government bonds, with one saying the change followed a regulatory guidance.
As big lenders have been selling some government bonds in the past few weeks, traders had sought shelter in seven-year notes, one of the least traded parts of the market to bet on further interest rate cuts. Regulators have been focusing on longer-dated bonds so far to tame the market rally.
While efforts to break the frenzy have shown some results, the early successes are already fast evaporating. Yields on mid-to-long term sovereign debt, including 7-year notes, fell on Wednesday while short term yields rose, as traders digested the first bank loan contraction in nearly two decades.
The data cemented bets that the People’s Bank of China will have to ease monetary policy further, undermining this week’s yield rebound, which was triggered by a slew of measures to squeeze out speculators.
–With assistance from Wenjin Lv, Jing Zhao and Iris Ouyang.
(Adds China warning in fifth graph, updates prices at bottom.)
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