China’s central bank announced it will pause government bond purchases, marking its latest effort to curb investor pessimism over weak economic growth, which has pressured the currency and eroded confidence among businesses and consumers.
The People’s Bank of China (PBOC) stated on Friday that it will temporarily halt sovereign debt purchases this month due to a supply-demand imbalance. The central bank will resume purchases when market conditions stabilize.
Benchmark bond yields, which had plunged to record lows due to expectations of aggressive policy easing to revive the sluggish economy, rose following the announcement. Investors have increasingly turned to bonds amid a prolonged property crisis, weak consumer spending, and fears of deflation. Meanwhile, China’s currency continues to hover near a record low in offshore markets.
Following the PBOC’s announcement, government bond yields rose across the board, with the five-year yield climbing by eight basis points and the 10-year yield increasing by four basis points to 1.675%. The offshore yuan also edged up by 0.1%.
Bond investors remain deeply bearish about China’s economic outlook, with some betting on a deflationary spiral. This stands in stark contrast to the United States, where Treasury yields are climbing amid robust economic growth, creating a dynamic that strengthens the dollar while putting pressure on the yuan. The yuan is now trading near the lower limit of its permitted range against the US dollar, despite repeated efforts by Chinese authorities to stabilize the exchange rate.
On Friday, the PBOC set a daily reference rate for the yuan that was significantly stronger than market expectations, signalling ongoing intervention. Additionally, the central bank plans to issue a record amount of bills in Hong Kong this month to absorb liquidity and support the currency.
China’s money markets indicate some traders expect authorities to delay further easing measures to prioritize stabilizing the yuan. The PBOC has been actively purchasing sovereign notes, with a net acquisition of 1 trillion yuan over five consecutive months through December, after initiating regular bond transactions with primary dealers in August. Earlier this week, the 10-year bond yield reached a historic low of 1.60%.
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