China halts bond buying to defend yuan as economic gloom worsens
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The People’s Bank of China will suspend purchases of sovereign debt this month as the supply of the bonds has fallen short of demand.
PHOTO: REUTERS
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BEIJING – China’s central bank said it will suspend buying government bonds, its latest attempt to temper investor bets on weak economic growth that have undermined the currency and sapped confidence among businesses and consumers.
The People’s Bank of China (PBOC) will suspend purchases of sovereign debt in January as the supply of the bonds has fallen short of demand, it said in a statement on Jan 10. The central bank will pick a time to resume buying depending on market conditions, it added.
Benchmark bond yields had slumped to an all-time low, driven by bets on aggressive policy easing to reignite a sluggish economy and demand for haven assets.
Investors have turned to bonds amid a prolonged property crisis,
The move reflects “the authorities’ discomfort with plummeting government bond yields and increasing yuan depreciation pressure”, said Mr Ken Cheung, chief Asian foreign-exchange strategist at Mizuho Bank.
“The yield level should already have aggressive pricing of PBOC easing this year, while the yuan will remain under pressure on a firm dollar and tariff threats.”
The PBOC overhauled its policy framework in 2024 and added government bond trading as a tool to manage liquidity in the economy, a step to make it operate more like global peers.
But its use of the tool has been challenged by the bond rally, a problem for the PBOC due to concerns over financial risks and the pessimistic signal it sends on the outlook for growth.
Bond investors have never been so pessimistic about the world’s second-largest economy, with some now piling into bets on a deflationary spiral. The contrast with the US is stark, where Treasury yields are climbing higher by the day, powered by seemingly unstoppable economic growth stateside.
That is a dynamic that favours the dollar and the yuan has fallen to trade near the weak edge of its permitted band versus the US currency, despite efforts by the authorities to stabilise the exchange rate.
“This marks another move by the PBOC to support the yuan exchange rate,” said Ms Serena Zhou, an economist with Mizuho Securities Asia.
On Jan 10, the PBOC issued yet another daily reference rate for the managed currency that was significantly stronger than the market’s forecast.
It also plans to issue a record amount of bills in Hong Kong in January to soak up liquidity and support the yuan.
The PBOC has purchased a net one trillion yuan (S$186.7 billion) of sovereign notes for five straight months through December, after starting regular bond transactions with primary dealers in August.
China government bond yields rose across the curve following the statement, with the five-year rate climbing eight basis points and 10-year rate gaining four basis points to 1.675 per cent. The offshore yuan edged 0.1 per cent higher.
“We think this suspension is unlikely to last as Chinese policymakers try to guide a moderate rise in prices and aim for accommodative monetary policy to support growth,” said Mizuho’s Ms Zhou.
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