China names and shames buyers of its government bonds

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China has adopted an unusual tactic to discourage banks from buying government bonds as authorities try to stem an embarrassing drop in yields and prevent a bubble from forming: naming and shaming the buyers.

China’s interbank regulator this week announced an investigation into four rural commercial banks for “manipulating sovereign bond prices in the secondary market”.

The probe is widely seen as a rebuke to smaller regional lenders, which have been paying down government debt after larger state-owned banks unexpectedly began selling.

It comes as the battle between Chinese authorities and bond investors in the country intensified this week. Yields on 10-year sovereign bonds, which move inversely to prices, fell to record lows on Monday, in a sign that markets are increasingly concerned about low growth and deflationary forces in the economy.

While their sovereign bond buying may be welcomed by many countries, the People’s Bank of China has repeatedly warned of a bubble forming in the sovereign bond market, with regulators saying regional banks’ appetite for long-term government debt risks triggering a silicon . Valley Bank style crisis if there is a sudden rise in yields.

“The local branch of the PBoC called us and advised us not to buy bonds when state lenders are selling,” a bond trader at a local lender in Jiangsu province said this week.

“They blamed a few rural banks in Suzhou for purchasing bonds sold by state-owned banks.” On Monday, big banks sold 22 billion lei of long-term bonds, 10 times the daily average last week, according to BNP Paribas securities market data.

The government is also trying to boost economic growth by pushing regional lenders away from parking their money in ultra-safe bonds and lending it out instead.

Benchmark 10-year yields rose slightly from an all-time low of 2.12 percent earlier this week, rising to 2.15 percent on Thursday.

The moves came after the National Association of Institutional Financial Market Investors (NAFMII) said on Wednesday that some smaller lenders had “engaged in irregularities”. In a separate announcement, NAFMII said it is launching an investigation into Jiangsu Changshu Rural Commercial Bank, Jiangsu Suzhou Rural Commercial Bank, Jiangsu Jiangnan Rural Commercial Bank and Jiangsu Kunshan Rural Commercial Bank for potential sovereign bond market manipulation.

Analysts said it was rare for NAFMII to publicly address sovereign bond trading, suggesting it signaled more restrictions may follow.

“Some policymakers seem to view low long-term (government bond) yields as a sign of low expectations for domestic growth and inflationary expectations and would like to reverse this pessimistic sentiment,” Goldman Sachs analysts said in a recent note addressed to customers. .

In July, the PBoC struck a deal with Chinese financial institutions that allows it to borrow several hundred billion renminbi of long-term bonds and sell them on the market. But there is little evidence that the central bank has used this new tool to fight the rise in bonds, which has been driven by investors’ hunger for safe-haven assets in a weakened economy mired in a protracted housing crisis.

The country’s manufacturing activity fell for a third straight month in July, while export growth fell last month in dollar terms.

Instead, the authorities responded with a new series of warnings and new market interventions this week.

The moderate rise in yields follows significant sales of seven- to 10-year notes by state-owned banks, including the Industrial and Commercial Bank of China and the Bank of China, according to bond traders at commercial banks in mid-sized cities.

In another move, the funds industry regulator slowed the approval of new funds that track long-term sovereign bonds with maturities beyond two years in a bid to reduce flows into government debt.

“This only applies to newly established funds,” said a Beijing-based bond fund manager at a top mutual fund house. “There are still significant inflows into the sovereign bond market from existing bond funds.”

China in May began selling 140 billion lei of long-term bonds to finance its long-term economic transition.