SHANGHAI (Reuters) – China’s central bank can borrow hundreds of billions of yuan worth of bonds and plans to sell them depending on market conditions, it told Reuters on Friday, in a move seen by markets as part of efforts to cool bond prices.
The People’s Bank of China (PBOC) has signed agreements with several major financial institutions for bond borrowing, and plans to borrow medium- to long-term bonds on an unsecured, open-end basis and sell them according to market conditions.
The officials’ comments come at a time when China’s government bonds have performed well this year, pushing yields to record lows as a shaky economy and volatile stock market have driven savers into the safe haven of fixed income.
Chinese government bond futures fell across the board on Friday, but bond yields, which move inversely to prices, rose.
Ming Ming, chief economist at CITIC Securities, said the comments gave further clarity to the PBOC’s borrowing and subsequent bond sales.
“The People’s Bank of China’s holdings of government bonds amount to hundreds of billions of yuan, and any concentrated selling on one day will have a major impact on the market,” Min said.
The People’s Bank of China said earlier this week that it would soon borrow government bonds from some primary dealers and detailed plans that analysts say are aimed at setting a floor on plummeting domestic interest rates.
The People’s Bank of China’s borrowing of government bonds sets up the possibility of selling government bonds, a new tool to help control credit flows and market yields.
“While a broader monetary tightening is unlikely, the best the PBOC can probably hope for is to engineer a short-term lull in bond gains,” said Julian Evans-Pritchard, head of China economics at Capital Economics.
People’s Bank of China Governor Pan Gongsheng suggested at the Lujiazui forum last month that the central bank may soon start trading bonds in the secondary market.
The central bank said in May it was closely monitoring current bond market developments and potential risks and would sell lower-risk debt, including government bonds, if necessary.
The People’s Bank of China’s bond borrowing agreement was first reported by Bloomberg News.
(Reporting by newsrooms in Shanghai and Beijing; Editing by Christian Schmollinger and Lincoln Feast)
