Financial institutions that are gobbling up Chinese government bonds are, in essence, betting against the Chinese economy, according to China’s central bank-backed Financial News report on Saturday. The report cements the concerns of industry sources and experts over the country’s bond market, following the People’s Bank of China’s expressed concerns and the introduction of measures to sell treasury bonds to temper a bond rally.
The People’s Bank of China has been very vocal in its desire to keep an upward-sloping yield curve and try to minimise bond-market risks, the paper said. The central bank only disclosed earlier this month that it has hundreds of billions of yuan worth of bonds to borrow and sell at an appropriate time. Some experts told state-backed Financial News this would be a move aimed at stabilising the exchange rate and economic expectations.
Sources familiar with the matter said the move of the central bank was actually a response to a surge in bond purchases as it was concerned that market stability could be at risk. By selling treasury bonds, the PBOC aims to cool off the current rally of bonds and ensure the yield curve is balanced. Such an approach makes clear how the central bank stays committed to ensuring financial stability and managing economic expectations.
“Financial institutions frantically snapping up government bonds equals to expecting that interest rates will get lower and lower in the future,” the paper said.
“They are basically shorting China’s yuan and the Chinese economy, increasing the pressure for capital outflows.”
In a nutshell, such actions on the part of the PBOC reflect the tight wire between maintaining stability in markets and heeding economic concerns.