(Bloomberg) — China has initiated stress tests with financial institutions on their bond investments, to make sure they can handle any market volatility should a record-breaking rally reverse, according to state-run media.
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The People’s Bank of China has recently gradually started the tests, wary of risks that a bull run might lead to one-sided bets in long-term government bonds, according to a front-page report by Financial News. Its intention may not necessarily be to significantly push yields higher, the central bank-backed newspaper said citing an unidentified source.
By doing the tests, the authorities want to see if banks can handle drastic market swings in hypothetical and extreme conditions with their current holdings of assets, the paper said. In the case of the bond market, officials may want to see how banks can react if yields surge by 10, 20 or even 50 basis points in a sudden move, it added.
A stellar rally in Chinese bonds stalled amid authorities’ measures to cool the sentiment through measures including having state banks sell their bonds holdings and gathering financial institutions for meetings. That has triggered a collapse in government bond trading as investors consider the regulatory moves.
The central bank did not seek to nor will it seek to ban legitimate investments or trading in its government bonds, but it sees risks in a buying spree of the securities, Bloomberg earlier reported, citing people familiar with the PBOC’s thinking.
Financial risks in key areas are being resolved in an orderly manner, PBOC Governor Pan Gongsheng said in an interview with state broadcaster China Central Television that aired Saturday. China will adhere to a supportive monetary policy stance and promote credit growth and gradual decline funding costs, he added.
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