Central Bank of China Purchases Government Bonds

(This Sept. 30 story has been corrected to fix Wei Li’s title in paragraph 6)

SHANGHAI (Reuters) – The Chinese central bank announced on Monday that it had purchased 200 billion yuan ($28.52 billion) of the country’s government bonds through open-market operations in September.

China’s long-dated bond yields saw a sharp reversal last week, following record low touches, after the central bank and government announced significant stimulus plans aimed at revitalizing a sluggish economy.

The People’s Bank of China (PBOC) explained that the operation was intended to “strengthen counter-cyclical adjustment of monetary policy and keep banking system liquidity reasonably ample.”

The bank did not specify the maturity of the bonds purchased, unlike last month.

Prior to last week, China’s bond market experienced a prolonged rally as banks and investors shifted towards safer assets amid an unstable economy. The central bank had cautioned participants about inflated bond prices for weeks and sold long-dated bonds previously to temper the market.

Wei Li, head of multi-asset investments for China at BNP Paribas (OTC:BNPQY), stated, “Ultimately, the PBOC’s goal of maintaining an upward-sloping yield curve supports lower short-term yields to stimulate economic growth and higher long-term yields to encourage investment.”

Last week, China unveiled its most robust stimulus package since the pandemic, resulting in record stock market gains. Conversely, bond prices fell sharply.

Li remarked, “It’s possible that some funds may shift from bonds into equities, particularly as participants foresee stronger growth and higher returns in stocks. However, this shift may not be dramatic.”

“The key factor will be how sustainable and impactful these policy measures are in driving economic recovery and investor sentiment.”

Since last Wednesday, yields on ten-year and thirty-year bonds surged by 13 and 22 basis points respectively, with the spread between 1-year and 10-year bonds widening by 15 basis points, indicating a steeper yield curve.

In August, the assets of Chinese bond mutual funds declined for the first time this year, falling to 6.55 trillion yuan, a 6% decrease from the previous month, according to official data.

The rapid increase in yields suggests that the PBOC may consider purchasing long-term bonds, which would mark a significant shift from its prior actions.

The PBOC disclosed that it had bought short-dated bonds and sold long-dated bonds in August for the first time in a new open market operation column.

($1 = 7.0120 Chinese yuan renminbi)