China's bond market intervention reveals financial stability worries
BEIJING — China's latest efforts to stem a bond market rally reveals wider worries among authorities about financial stability, analysts said.
Slow economic growth and tight capital controls have concentrated domestic funds in China's government bond market, one of the largest in the world. Bloomberg reported Monday, citing sources, that regulators told commercial banks in Jiangxi province not to settle their purchases of government bonds.
Futures showed prices for the 10-year Chinese government bond tumbled to their lowest in nearly a month on Monday, before recovering modestly, according to Wind Information data. Prices move inversely to yields.
«The sovereign bond market is the backbone of the financial sector, even if you run a bank-driven sector like China [or] Europe,» said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis.
She pointed out that in contrast to electronic trading of the bonds by retail investors or asset managers in Europe, banks and insurers tend to hold the government bonds, which implies nominal losses if prices fluctuate significantly.
The 10-year Chinese government bond yield has abruptly turned higher in recent days, after falling all year to a record low in early August, according to Wind Information data going back to 2010.
At around 2.2%, the Chinese 10-year yield remains far lower than the U.S. 10-year Treasury yield of nearly 4% or higher. The gap reflects how the U.S. Federal Reserve has kept interest rates high, while the People's Bank of China has been lowering rates in the face of tepid domestic demand.
«The problem is not what it shows [about a weak economy],» Garcia-Herrero said, but «what it means for financial stability.»
«They have [Silicon Valley Bank] in mind,
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