A statement from the People’s Bank of China (PBOC) from January 10 revealed that the central bank had halted government bond purchases as the supply remained lower than the bonds’ demand. The PBOC mentioned that the purchases would resume after properly monitoring the government bonds market supply and demand.
The central bank’s decision led to the rise in Chinese bond yields significantly. The move also led to rumours that the central bank’s decision aimed to prevent the yuan from losing more ground. The Chinese government kicked off the bond purchases in September to help the yuan gain more ground and ease the country’s monetary policies.
A CNBC report revealed one of the reasons behind the yuan depreciation experienced in the past year, citing the growing gap between China’s and U.S. bond yields. The report mentioned that the Chinese bond yields have dropped by about 100 basis points over the past year, dropping below 1.6%. Compared to U.S. bond yields, which have been at approximately 4.7%, the gap has steadily increased.
PBOC Halts Bond Buying to Defend Yuan as Economic Gloom Worsens
The People’s Bank of China will halt purchases of sovereign debt this month as the supply of the bonds has fallen short of demand, it said in a statement on Friday.
The move reflects “the authorities’ discomfort… pic.twitter.com/1eUkoFnyTY
— Tracy Shuchart (𝒞𝒽𝒾 ) (@chigrl) January 10, 2025
A recent TradingView report further highlighted that the yuan had hit a 16-month low at the beginning of the week, trading below 7.3 CNY per dollar. The report further cited a growing worry among investors despite the central bank’s efforts to stabilize the currency. The 16-month low was 5% lower than the yuan’s peak in September.
Since the temporary pause in buying bonds, the 10-year and 30-year bond yields have increased by about 4 and 8 basis points, respectively. The CNY rose by about 0.1% before dropping to 7.3469 CNY per dollar.
Analyst expects more downtrends in bond yields
The Shanghai Anfang Private Fund Co. research director Huang Xuefeng speculated that the bond yields would continue on a downward trend despite the central bank’s efforts. Xuafeng explained that investors were looking for better investment options, which the country lacked.
Goldman Sachs China chief economist Hui Shan shared the same sentiment, explaining that investors were more pessimistic about long-term bond growth and inflation. Shan suggested the negative sentiment could lead to further plunges in government bond yields.
Pinpoint Asset Management chief economist Zhiwei Zhang also mentioned that the PBOC’s recent move to stop bond purchases indicated the government’s increased worry about bond yields falling further. Zhang speculated that the move was the PBOC’s effort to prevent bond yields from further affecting the declining yuan.
The PBOC announced plans to enact ‘moderately loose’ fiscal policy changes to fuel China’s economic growth, as well as to stabilize the yuan. The mention of the ‘moderately loose’ policy change came into consideration by the PBOC for the first time in 14 years. The country has been experiencing low domestic consumption, housing crises, and lower exports.
China gets ready for Trump’s inauguration
A Reuters report confirmed that China’s central bank’s decisions are efforts to stabilize the economy before President Donald Trump’s re-entry into office on January 20. China is one of the countries that will be on the harsh end of Trump’s proposed tariffs.
President Trump promised to increase a 10% tariff for goods from China on top of any additional tariffs in place. The U.S. president mentioned on Truth Social that the tariff increase would prevent Fentanyl imports from China into the U.S. Trump had promised during his campaign that he would hike tariffs for China’s imports to 60% or higher.
The Chinese government is taking more steps in preparation for Trump’s inauguration, including more gold purchases. China accumulated over 330,000 gold troy ounces in December, with more purchases expected before January 20.
The PBOC also plans to introduce more RMB bills into the Hong Kong market on January 15. A tender letter from the Hong Kong government revealed that China would release RMB60 million of 6-month bills into the market. The PBOC will settle the tender on January 17.
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