Chinese Central Bank 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 bought 200 billion yuan ($28.52 billion) in government bonds during September's open-market operations.

Last week, China's long-dated bond yields sharply reversed after reaching record lows, following major stimulus announcements aimed at reviving the struggling economy.

The People's Bank of China (PBOC) stated that the operation aimed to "strengthen counter-cyclical adjustment of monetary policy and keep banking system liquidity reasonably ample."

However, the bank did not specify whether the bonds bought were short-term or long-dated as it did previously.

Before last week, the bond market in China experienced a record-breaking rally as banks and investors turned to safer assets amid economic challenges. The central bank had previously warned about inflated bond prices and recently sold long-dated bonds to temper the market.

According to Wei Li, head of multi-asset investments for China at BNP Paribas, "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, the government introduced its most significant stimulus package since the pandemic, leading to record stock market gains, though bond prices fell sharply.

Li suggested that some investors might transition from bonds to equities as they anticipate stronger growth and better stock returns, although such a shift may not be significant.

"The key factor will be how sustainable and impactful these policy measures are in driving economic recovery and investor sentiment," Li added.

Ten-year and 30-year bond yields have risen by 13 and 22 basis points, respectively, since the previous Wednesday, indicating a widening spread between 1-year and 10-year bonds, which suggests a steeper yield curve.

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

This rapid yield reversal implies that the PBOC may start purchasing long-term bonds, marking a significant shift from its previous stance.

In August, the PBOC confirmed buying short-dated bonds and selling long-dated ones, a disclosure that was part of new open market operation reporting.

($1 = 7.0120 Chinese yuan renminbi)