PBoC starts trading Chinese government bonds

China’s central bank confirmed today (August 30) that it had started trading Chinese government bonds this month. The announcement followed weeks of speculation over when it would activate its new monetary policy toolkit to bolster low sovereign yields.

The People’s Bank of China (PBoC) said it had bought short-term government bonds and sold long-term government bonds to some primary dealers in August, according to a statement. It said it had bought a net 100 billion yuan ($14.1 billion) of government bonds this month.

The PBoC published the statement under a new section of its website, titled “notices on the purchase and sale of treasury bonds”.

China’s long-dated sovereign bond yields fell to record lows this month as investors stocked up on the safer assets amid the country’s economic slowdown.

Over the past few months, the central bank has repeatedly warned that financial institutions holding large amounts of long-dated sovereign debt could be exposed to interest rate risk.

The bank had taken other steps in preparation for its intervention in the bond market.

In June, the PBoC’s governor Pan Gongsheng said it would gradually include the buying and selling of government bonds on the secondary market in its monetary policy toolkit.

Pan said the bank would use the new policy tool to inject base money into the financial system and to manage liquidity. He stressed that bond trading by the PBoC “does not mean quantitative easing”, and that the bank would sell bonds as well as buy them.

In July, the PBoC said it had lined up hundreds of billions of yuan of bonds that it could borrow from lenders and then sell, depending on market conditions. Analysts widely interpreted the move as a precursor to the bank selling government bonds in the future.

State media on August 26 reported that the bank had started conducting stress tests on financial institutions’ bond investments.

Bond-buying move on August 29

On August 29, the PBoC said it had bought 400 billion yuan of special government bonds from primary dealers that day.

The bank said on its website that it had purchased 300 billion yuan of 10-year bonds and 100 billion yuan of 15-year bonds through open-market operations.

The Ministry of Finance had sold the same batch of notes to designated banks earlier in the day to roll over maturing bonds. The ministry had announced the rollover plan on August 19.

The special bonds were part of the 1.55 trillion yuan of notes that the ministry had issued in 2007 to fund the establishment of sovereign wealth fund the China Investment Corporation.

The ministry said its latest operation followed its previous rollovers of some of the same debt in 2017 and 2022. It said the operation would not add to China’s fiscal deficit.

“The bonds that the PBoC just purchased were issued by the Ministry of Finance earlier today in order to replace maturing bonds that the PBoC already held on its balance sheet,” Julian Evans-Pritchard, head of China economics at Capital Economics, said in a note.

He said this meant the move would have no impact on the balance of supply and demand for government bonds in the secondary market.

Buying government bonds, he said, “might seem like an odd move given that the central bank has spent recent months trying to prevent yields from falling. But most signs suggest that it still intends to reduce its government bond holdings rather than increase them.”