China’s central bank has hundreds of billions of yuan of bonds at its disposal to cool long rally

The People’s Bank of China (PBOC) has stated that it has a significant amount of bonds available for borrowing and will sell them based on market conditions. This move is seen as an attempt to dampen a strong rally in the bond market. The PBOC has signed agreements with major financial institutions to borrow medium- and long-term bonds on an open-ended unsecured basis. The announcement comes as China’s sovereign bonds have seen robust performance this year, with yields reaching record lows due to economic uncertainty and volatility in the stock market. As a result of the news, treasury bond futures in China experienced a decline, while bond yields increased.
According to Ming Ming, the chief economist at CITIC Securities, the recent comments have provided further clarification on the central bank’s actions regarding borrowing and selling treasury bonds.

Ming pointed out that with the central bank having access to treasury bonds worth hundreds of billions of yuan, a concentrated selling of these bonds in a single day would have a significant impact on the market.

Earlier this week, China’s central bank announced its plan to borrow treasury bonds from primary dealers in order to stabilize falling domestic interest rates. Analysts believe that this move is aimed at establishing a minimum level for interest rates.

The borrowing of treasury bonds by the PBOC will pave the way for potential selling of these bonds. This new tool will assist the central bank in managing the flow of credit and market yields.
Julian Evans-Pritchard, head of China economics at Capital Economics, stated that without broader monetary tightening, which does not seem likely, the People’s Bank of China (PBOC) can only hope to temporarily halt the bond rally. PBOC Governor Pan Gongsheng recently suggested at the Lujiazui Forum that the central bank may soon engage in trading in the secondary bond market. In May, the PBOC announced its intention to sell low-risk debt, including government bonds, when necessary, while closely monitoring changes and potential risks in the bond market. The news of the PBOC’s bond borrowing agreement was first reported by Bloomberg.