China’s central bank, the People’s Bank of China (PBOC), is taking steps to cool the country’s surging bond market. The central bank is concerned about the potential risks associated with the recent rally, deeming it unsustainable. Officials are determined to maintain a normal upward-sloping yield curve, a key factor in ensuring financial stability.
The PBOC has expressed particular concern about rural commercial banks, which hold significant positions in medium- and long-term treasury bonds. A sharp increase in interest rates could lead to significant losses for these banks, amplifying their interest-rate and credit risks. This situation echoes concerns raised by PBOC Governor Pan Gongsheng, who recently highlighted the need to address risks similar to those that led to the collapse of the U.S. Silicon Valley Bank last year.
To mitigate these risks, the PBOC is actively intervening in the bond market. The central bank is selling treasury bonds from its vast holdings, aiming to balance supply and demand and prevent further price surges. These actions are part of a broader effort to prevent excessive speculation and ensure a balanced market.
The PBOC assures that these actions won’t impact overall liquidity conditions, maintaining reasonably ample liquidity in the financial system. This proactive approach reflects a commitment to managing potential risks and ensuring financial stability in China’s bond market. The central bank’s efforts are likely to be a key theme in Chinese financial policy going forward, demonstrating a commitment to stability and preventing excessive speculation.