People walk past the headquarters of the People’s Bank of China in Beijing, China, on September 28, 2018.
Jason Lee | Reuters
BEIJING – China’s latest moves to curb a bond market rally reveal broader concerns about financial stability, analysts say.
Slow economic growth and strict capital controls have concentrated domestic funds in China’s government bond market, one of the largest in the world. Bloomberg reported on Monday, citing sources The supervisory authority informed Jiangxi Provincial Commercial Bank Not addressing the government bonds they buy.
Wind information data showed that futures showed that China’s 10-year government bond prices fell to their lowest point in nearly a month on Monday before recovering slightly. Price and yield are inversely related.
Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, said: “Sovereign bond markets are the backbone of the financial sector, even if you operate in a country like China (or) Europe. of bank-driven sectors.
She noted that unlike European retail investors or asset managers who trade bonds electronically, banks and insurance companies tend to hold government bonds, which means there will be nominal losses if prices fluctuate significantly.
Wind information data shows that since 2010, China’s 10-year government bond yields have suddenly risen in recent days after falling to a record low for the year in early August.
China’s 10-year Treasury bond yield is around 2.2%, still well below U.S. 10-year Treasury bond yields of nearly 4% or more. The gap reflects how the Fed keeps interest rates high while People’s Bank of China Interest rates have been lowered in the face of tepid domestic demand.
“The question is not what it represents (economic weakness), but what it means for financial stability,” Garcia-Herrero said.
“They took[Silicon Valley Bank]into account, so that means a change in sovereign bond yields would have a significant impact on your sovereign balance sheet,” she continued, adding that “the underlying problem is bigger than Silicon Valley Bank, which is That’s why they” we are so worried about. “
Silicon Valley bank collapse March 2023 saw one of the largest bank failures in the United States to date. The company’s woes are largely attributed to changes in capital allocation caused by the Federal Reserve’s sharp interest rate hikes.
Pan Gongsheng, Governor of the People’s Bank of China, said at a press conference June Lecture The central bank needs to learn lessons from the Silicon Valley Bank incident and “timely correct and block the accumulation of risks in the financial market.” He called for special attention to “maturity mismatch and interest rate risks arising from the large holdings of medium and long-term bonds held by some non-bank entities”. That’s according to CNBC’s translation into Chinese.
Zerlina Zeng, head of Asia credit strategy at CreditSights, pointed out that the People’s Bank of China has stepped up its intervention in the government bond market, from increasing regulatory scrutiny of bond market transactions to directing state-owned banks to sell Chinese government bonds.
She said in a statement that the People’s Bank of China strives to “maintain a steeper yield curve and manage risks arising from the concentrated holding of long-term government bonds by urban and rural commercial banks and non-bank financial institutions.”
“We believe that the purpose of the central bank’s intervention in the bond market is not to raise interest rates, but to guide banks and non-bank financial institutions to provide credit to the real economy instead of depositing funds in bond investments,” Zeng said.
Insurance gap reaches “trillions”
Stability has long been important to Chinese regulators. Even if yields are expected to fall, the pace at which prices are rising is cause for concern.
Edmund Goh, abrdn’s head of China fixed income, said this is particularly a problem for Chinese insurance companies that park most of their assets in the bond market after guaranteeing fixed returns on life insurance and other products.
He said this was in contrast to the way insurers in other countries sell products, where returns vary based on market conditions and additional investment.
“With the rapid decline in bond yields, this will affect the capital adequacy ratio of insurance companies. This is an important part of the financial system,” Wu added, estimating that this may require “trillions” of yuan to make up for it. One trillion yuan is equivalent to approximately 140 billion U.S. dollars.
“If bond yields fall more slowly, that does give the insurance industry some breathing room.”
Why the bond market?
Insurers and institutional investors have piled into China’s bond market, in part because of a lack of investment options in the country. The housing market plummeted, while the stock market struggled to recover from multi-year lows.
Natixis’ Garcia-Herrero said these factors make the Chinese central bank’s bond market intervention far more important than Beijing’s other interventions, including foreign exchange intervention. “What they are doing is very dangerous because the damage could be huge.”
“Basically I’m just worried that things are going to get out of control,” she said. “This happens because there are no other investment options. Gold or sovereign bonds, that’s it. With a country as big as China, those are the only two options and you can’t avoid a bubble. The solution doesn’t exist unless you open the capital account.”
China’s central bank did not immediately respond to a request for comment.
China pursues a state-led economic model and has gradually introduced more market forces over the past few decades. This state-led model has led many investors in the past to believe that Beijing would step in to stem the losses no matter what.
abrdn’s Goh said the news that a local bank had canceled bond settlement “shocked most people” and “shows desperation on the part of the Chinese government”.
But Wu said he didn’t think it would be enough to affect foreign investors’ confidence. He had expected the central bank to intervene in the bond market in some form.
Beijing’s production woes
Beijing has publicly expressed concerns about the pace of bond purchases, which have rapidly reduced yields.
In July, the central bank’s Financial News criticized rush to buy Chinese public bonds as “Short-selling” the economy. The outlet later diluted the headline to describe such behavior It is a kind of “interference”, According to translation by CNBC Chinese media.
Chang Le, senior fixed income strategist at ChinaAMC Asset Management, pointed out that China’s 10-year government bond yields usually fluctuate within a 20 basis point range around the medium-term lending facility, one of the benchmark rates of the People’s Bank of China. However, he said that this year’s yield rate has been 30 basis points lower than MLF, indicating that interest rate risks are accumulating.
The potential for gains is boosting demand for bonds after such purchases outpaced supply earlier this year, he said. The People’s Bank of China has repeatedly warned of the risks while trying to maintain financial stability by addressing a lack of bond supply.
However, low yields also reflect expectations of slower growth.
“I think poor credit growth is one of the reasons why bond yields are lower,” Wu said.
Loan data released on Tuesday night showed that new RMB loans in “total social financing” fell in July for the first time since 2005.
“The latest volatility in China’s domestic bond market highlights the need for reforms to guide market forces toward efficient credit allocation,” said Charles Chang, managing director at S&P Global Ratings.
Zhang added: “Measures to strengthen market diversity and discipline may help strengthen the People’s Bank of China’s regular actions. Reforms of the corporate bond market, in particular, could facilitate Beijing’s pursuit of more efficient economic growth and thereby reduce long-term debt.”
