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Rising Chinese government debt has raised alarm among regulators in Beijing, who warn local banks’ demand for bonds risks a crisis similar to last year’s Silicon Valley bank collapse.
The People’s Bank of China, which regulates the financial sector, has expressed displeasure with the scale of the bank’s investments in long-term government bonds, which, like SVB’s U.S. bond portfolio, are sensitive to interest rate fluctuations.
Net purchases of such bonds by Chinese banks in the first quarter of this year, overwhelmingly from regional financial institutions, totaled RMB 270 billion ($37 billion), according to securities market data analyzed by BNP Paribas. did.
“If a large amount of funds are tied up in low-yield long-term bonds and the cost of debt rises significantly, the funds will be in a passive situation where they will be withdrawn significantly due to sudden price changes,” a central bank official said. Told. This week’s National Financial News.
“This is exactly what caused the liquidity crisis. . . Last year it was Silicon Valley Bank.”
SVB was acquired by the U.S. government in March 2023 following a bank run sparked by concerns that it would be unable to honor its deposits due to rising interest rates on its long-term U.S. Treasury holdings. At the time, this was the second largest bank failure in U.S. history.
China is facing a slow burnout of its huge real estate sector, which has historically been the focus of much of the country’s investment, but which is spilling over into the stock market as economic growth slumps. .
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Problems with the country’s large number of regional banks could exacerbate the world’s second-largest economy’s woes by restricting lending at a critical time.
Local banks have been piling up long-term government bonds since January as a haven from problems in the equity and real estate sectors, pushing government borrowing costs to their lowest level in decades.
But some analysts warn of the dangers posed by seemingly safe government debt.
“For smaller lenders, chasing something longer term is actually risky.” [debt]” said Wang Ju, head of Greater China foreign exchange and rates strategy at BNP Paribas Securities. “If something goes wrong and yields start to rise… the losses can be high. Don’t forget the lessons of regional banks like SVB in the US.”
In a sign of strong demand for long-term government bonds, the yield on China’s 30-year government bonds, which moves inversely to prices, fell to about 2.5% this week, its lowest level in 20 years.
The yield on the 10-year Treasury note hit a record low of 2.2% in March. It stabilized after repeated warnings from officials.
Local banking regulators in some eastern and central states have told small lenders to stop increasing their holdings of long-term bonds and warned them about liquidity risks, according to domestic media reports.
Despite the government’s measures, local banks still purchased 400 billion yuan worth of government bonds from March 1 to April 16, according to secondary transaction data from China’s interbank bond market.
In contrast, Chinese mutual funds bought much less during the same period, at RMB78 billion, while major Chinese banks sold RMB220 billion of their bond holdings.
“Small banks in particular are more aggressive in investing in government bonds than their larger rivals,” said Chen Zhenheng, chief fixed income analyst at CICC’s research department.
Chinese officials are still reeling from the country’s 2016 bond market collapse.
A central bank official suggested to Financial News that the Chinese government may step up bond issuance to curb stock price rises while intervening in the secondary market to help manage liquidity.
Premier Li Qiang announced in March that China would issue 1 trillion yuan in super-long-term special central government bonds this year to support the economy.
