China’s central bank wary of bond bonanza as secondary trade talk continues

China’s central bank has indicated openness to secondary bond trading, but will also take steps to mitigate risk

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The People’s Bank of China, the country’s central bank, has warned of potential risk areas in the bond market as it mulls stepping up its activity. Photo: Bloomberg

Published: 6:30pm, 12 Aug 2024

China’s central bank has taken a more vocal stance towards secondary market bond trading, suggesting tough action – punishment of rule violators or direct intervention – could be in the works as it attempts to fend off a domestic bond frenzy and optimise its yield curve, analysts said.

The People’s Bank of China said it would gradually increase the buying and selling of treasury bonds in its open-market operations in its latest quarterly monetary policy report on Friday.

It also mandated stress tests for financial institutions’ bond asset exposure to mitigate interest rate risk, and pointed out some bonds and their by-products had been leveraged for “obviously higher” yields than their underlying assets, another source of potential risk.

“This series of warnings is of particular concern,” wrote GF Securities analyst Zhong Linnan in a research note, adding the present unilateral expectations of interest rate cuts could change dramatically with PBOC’s operations, regulations and outlook on expectation management.

On Wednesday, the National Association of Financial Market Institutional Investors (NAFMII) – an affiliate of the PBOC – announced an investigation into four state-owned banks accused of manipulating government bond prices in the secondary market and channelling benefits through these actions.