China Intensifies Crackdown on Bond-Market Frenzy with New Measures

13 Aug, 2024

China Intensifies Crackdown on Bond-Market Frenzy with New Measures

Chinese authorities are intensifying efforts to control the government bond market, the world’s third-largest, with a series of unusual interventions. On August 9, regulators instructed rural banks in Jiangxi province to halt the settlement of recent government bond purchases, effectively forcing them to backtrack on market obligations. This move is part of broader measures aimed at curbing a market rally that drove yields to record lows, raising concerns about banks' overexposure to interest-rate risk. The interventions have had an immediate impact, with the benchmark 10-year yield rising from a record low of 2.12% to around 2.22%.

However, these actions carry risks. Government meddling could disconnect the bond market from its economic fundamentals, potentially damaging long-term investor confidence. China's history of intervening in shares and currency trading, often with chaotic outcomes, has already deterred international investors.

Recent data reflects ongoing pessimism, with foreigners pulling a record amount of money from China in the second quarter of the year. The People’s Bank of China had warned about interest rate risks since April, but the market ignored these warnings, prompting a stronger response to limit speculative positions in long-dated bonds.