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China’s bond market is in a state of fervor, a storm where long-dated sovereign bonds are surging to dizzying heights. Investors, spooked by an economy losing steam and stock markets that twist and turn like a dragon’s tail, are diving headfirst into these bonds, seeking the safety they once believed was solid as the Great Wall. But as the prices of these bonds ascend, yields are plummeting to record-breaking lows, and now, the powers that be are growing uneasy. The Chinese authorities are stirring, determined to rein in this runaway rally before it careens off a cliff.
Below lies a labyrinthine account of their efforts—a mélange of warnings, subtle market nudges, and not-so-subtle clampdowns, as they wrestle to regain control.
Warnings Echoed Across the Land
Since March, the People’s Bank of China (PBOC) has been sounding the alarm, a clarion call against the rising tide of bond prices. Whenever the yield on 30-year treasuries dared to dip below the 2.5% threshold, the PBOC’s warning bells tolled louder. A yield fall, after all, is but a reflection of soaring bond prices.
Pan Gongsheng, the PBOC Governor, took to the podium in June, casting a shadow of caution. He pointed across the Pacific, to the implosion of Silicon Valley Bank, a cautionary tale of what happens when short-term rates rise and a lender’s bond portfolio bleeds. He called for vigilance and underscored the need to keep China’s yield curve in line—long-term rates should hover above short-term ones, a signal of economic normalcy.
Selling
As the bond market became increasingly overheated, the PBOC hinted that it was stepping into the fray. Though shrouded in the fog of uncertainty, it seems the central bank began buying and selling bonds in the open market as part of its strategy.
By August, state banks, like shadowy giants, moved to dump 10-year and 30-year treasuries, unleashing a torrent of sales. Traders whispered of record-low yields and the data seemed to corroborate their claims, yet whether the PBOC itself took the stage as a seller remains an enigma.
Demand Dampening
To douse the flames of this bond-buying frenzy, regulators tightened their grip on the bond market’s fuel: new bond funds. In an apparent bid to choke off investments in long-dated treasuries, they restricted the duration of these funds. The usually steady flow of fund approvals trickled down to a near standstill. No new funds were given the green light for almost two months, up to mid-August—a move so quiet, it almost went unnoticed.
Then, in July, the PBOC quietly cut the collateral requirement for banks tapping into its medium-term lending facility (MLF). The message was clear: banks, with fewer long-term bonds needed as collateral, might just think twice before plunging deeper into the bond market’s murky waters.
Shakedown
Come August, the Chinese Securities Regulatory Commission struck hard, ordering brokerages to comb through their bond trading activities with the precision of an emperor’s scribe. The PBOC, meanwhile, flexed its muscle with stress tests and demanded more frequent reports from institutions on their bond holdings.
The crackdown didn’t stop there. A central bank-affiliated newspaper flashed warnings, declaring that trading accounts were not to be borrowed or transferred under any circumstances. Simultaneously, regulators launched an investigation into the trading habits of some regional banks—a probe that likely sent shivers down the spines of many.
Earlier in the year, in July and March, the PBOC had discreetly surveyed regional banks on their bond investments, laying the groundwork for this more overt crackdown.
The Aftermath
Every time the authorities hinted at or directly intervened in the market, bond yields jerked upwards. Yet, despite these tremors, yields remain precariously low. Investors, like seasoned gamblers, are betting that this bond rally is far from over, their faith unshaken as the economy continues to trudge through its doldrums.
The battle is far from over. The PBOC and regulators are determined to tame this market beast, yet it seems the beast may have a mind of its own. Only time will tell whether these efforts will douse the flames or merely fan them into an even greater inferno.
