(Bloomberg) — China’s central bank said it will suspend buying government bonds, its latest attempt to temper investor bets on weak economic growth that have undermined the currency and sapped confidence among businesses and consumers.
Most Read from Bloomberg
The People’s Bank of China will halt purchases of sovereign debt this month as the supply of the bonds has fallen short of demand, it said in a statement on Friday. The central bank will pick a time to resume buying depending on market conditions, it added.
Benchmark bond yields had slumped to an all-time low, driven by bets on aggressive policy easing to reignite a sluggish economy and demand for haven assets. Investors have turned to bonds amid a prolonged property crisis, weak consumption and concerns over deflation. China’s currency has fallen toward a record low offshore.
The move reflects “the authorities’ discomfort with plummeting government bond yields and increasing yuan depreciation pressure,” said Ken Cheung, chief Asian foreign-exchange strategist at Mizuho Bank Ltd. “The yield level should already have aggressive pricing of PBOC easing this year, while the yuan will remain under pressure on a firm dollar and tariff threats.”
China government bond yields rose across the curve following the announcement, with the five-year rate climbing as much as eight basis points and the 10-year rate gaining four basis points to 1.675%. The offshore yuan edged 0.1% higher.
The PBOC overhauled its policy framework last year and added government bond trading as a tool to manage liquidity in the economy, a step to make it operate more like global peers. But its use of the tool has been challenged by the bond rally, a problem for the PBOC due to concerns over financial risks and the pessimistic signal it sends on the outlook for growth.
Bond investors have never been so bearish about the world’s second-largest economy, with some now piling into bets on a deflationary spiral. The contrast with the US is stark, where Treasury yields are climbing higher by the day, powered by seemingly unstoppable economic growth stateside.
That’s a dynamic that favors the dollar and the yuan has fallen to trade near the weak edge of its permitted band versus the US currency, despite efforts by authorities to stabilize the exchange rate.
