CHINA’S central bank started a fresh round of checks on bond investments at banks as it prepares to cool a record-breaking rally, according to sources familiar with the matter.
Local branches of the People’s Bank of China (PBOC) have sent inquiries to regional lenders in at least three provinces, including Zhejiang, Jiangsu and Jilin, asking about their outstanding positions, holding structures, and leverage, said the sources, who asked not to be identified as the matter has not been made public.
The PBOC said earlier this month it has “hundreds of billions” of yuan of securities at its disposal it could borrow and sell in order to cool the bond market. The survey will help the PBOC gauge the potential impact of bond sales and prepare for future steps, said some of the sources. It remains unclear when the central bank will begin its government bonds purchases and sales.
Investors have flocked to long-term bonds due to weak economic expectations and a shortage of qualified assets, causing yields on 10-year and 30-year government bonds to hit near 20-year lows. The drop in yields has become a cause of concern for policymakers who fear a possible bubble forming in the market and losses for investors should they rebound sharply in the future.
The PBOC has repeatedly warned against bond-market exuberance, but the market is still questioning the impact of any moves. More than 70 per cent of participants say that yields are only likely to rise five to 10 basis points even if the central bank steps into the market, according to the latest Bloomberg survey.
Local branches of the National Financial Regulatory Administration have also looked into banks’ bond investments, asking some rural lenders to shorten the average duration of their bond holdings, Bloomberg reported last week.
The PBOC did not immediately reply to a fax seeking comment.
China’s growth expanded at the slowest pace in five quarters as faltering consumer spending undermined an export boom, fuelling calls for policymakers to step up support at a twice-a-decade economic meeting this week. BLOOMBERG
