What is the China Bank's ownership of Chinese securities?

China's central bank halted purchases of government bonds late last week in an attempt to slow one-way bond trading that has been weighing on the yuan, analysts said, CNBC reported.

The yield on China's 10-year government bonds fell to a record low this month, while the Hong Kong-traded yuan hit its lowest level against the U.S. dollar since September 2023 on Wednesday, the paper said.

"By suspending government bond purchases, the People's Bank of China is trying to calm the market," said Larry Hu, chief China economist at Macquarie.

The bank is concerned about the recent rapid decline in bond yields, he said, as it will increase pressure on the yuan to depreciate, raising the risk of a Silicon Valley-style event in 2023. The People's Bank of China began buying bonds last year, with Governor Pan Gongsheng saying in June that the institution would gradually include secondary market purchases and sales of government bonds among its monetary policy tools.

"The bank may be trying to signal to all market participants that rates have fallen too far too fast," said Peter Alexander, founder of Z-Ben Advisors in Shanghai. "The bank's move should lead to a rate hike, at least in the short term."

According to LNG chief economist Lynn Song, the immediate effect of stopping the purchases was a small increase in government bond yields. "We expect this impact to be relatively short-lived if the bank just takes a break, rather than defending a specific yield target as it did last year; the factors driving bond yields lower, such as weak market confidence, which fosters high demand for safe sources of yield, remain in place," Song said.

• Limiting stimulus

China is facing slower economic growth, and in late September the country stepped up interest rate cuts along with other support measures, after the US Federal Reserve pivoted to a more relaxed monetary policy, CNBC also writes.

"The decline in bond yields has reduced the extent to which the People's Bank of China can cut interest rates further, if it needs to continue stimulating the economy," said Zong Ke, portfolio manager at asset manager Wequant, in Shanghai.

In his opinion, the bank's sudden halt in purchases was also intended to warn investors not to bet speculatively on bond growth, which would further lower yields. According to the American publication, the People's Bank of China justified its decision by the existence of a shortage of bonds in the market and said that it would resume purchases when the balance between supply and demand changes.

• Capital outflows

Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, noted that the gap between Chinese and U.S. government bond yields has widened, putting pressure on the yuan's exchange rate, according to CNBC.

The yield on 10-year U.S. Treasury notes was about 4.7% on Friday, compared with 1.6% on 10-year Chinese government bonds. The stronger dollar and higher yields on U.S. bonds make dollar-denominated assets relatively more attractive to international investors - theoretically supporting capital outflows. This comes as the dollar has appreciated on the back of perceptions of U.S. economic resilience.

"The unusually high demand for bonds is driven, in part, by rising expectations for a massive stimulus in 2025 to counter weak consumption and fight deflationary pressures," said Brian Tycangco, an analyst at Stansberry Research. "Unfortunately, the suspension of bond purchases will reduce price transparency in the domestic bond market, making it somewhat more difficult for market participants to execute orders," the analyst added.

• Supporting the Yuan

Recently, China has stepped up its efforts to support the yuan by issuing treasury bills in the Hong Kong market, which it will do again this week, according to the article published by CNBC.

"In addition to suspending bond purchases, the bank is trying to use a mix of tools to signal that the yuan is stable and support a gradual decline in yields," said Zong Liang, chief researcher at the Bank of China. Haizhong Chang, director at Fitch Bohua, estimates that the bank's move can bring long-term bond yields "to a reasonable level and also help stabilize the yuan exchange rate," according to CNBC.