China's latest efforts to stem a bond market rally shows that authorities are worried about financial stability, analysts said.
She pointed out that in contrast to electronic trading of the bonds by retail investors or asset managers in Europe, banks and insurers tend to hold the government bonds, which implies nominal losses if prices fluctuate significantly.The 10-year Chinese government bond yield has abruptly turned higher in recent days, after falling all year to a record low in early August, according to Wind Information data going back to 2010.
Zerlina Zeng, head of Asia credit strategy, CreditSights, noted that the PBoC has increased intervention in the government bond market, from increased regulatory scrutiny of bond market trading to guidance for state-owned banks to sell Chinese government bonds. That's especially an issue for Chinese insurance companies that have parked much of their assets in the bond market — after guaranteeing fixed return rates for life insurance and other products, said Edmund Goh, head of China fixed income at abrdn.
Those factors make the PBoC's bond market intervention far more consequential than Beijing's other interventions, including in foreign exchange, said Natixis' Garcia-Herrero."It's very dangerous what they're doing, because losses could be massive." But Goh said he didn't think it was enough to affect foreign investor confidence. He had expected the PBoC to intervene in the bond market in some form.Beijing has publicly expressed concerns over the speed of bond buying, which has rapidly lowered yields.Chang Le, fixed-income senior strategist at ChinaAMC, pointed out that the Chinese 10-year yield has typically fluctuated in a 20 basis-point range around the medium-term lending facility, one of the PBoC's benchmark interest rates.