China's attempt to rein in government-bond rally will only slow it temporarily: analysts

An attempt by the People's Bank of China (PBOC) to stem a rally in government bonds is falling flat as growth worries persist. Any potential interventions might only slow the momentum temporarily, as the fundamentals have yet to turn the corner, analysts said.

The bond market rebounded quickly to recover from the shock of the central bank's announcement on Monday that it would borrow notes. Yields on 10- and 30-year Chinese government bonds closed down 1.3 and 1.2 basis points on Tuesday to 2.24 per cent and 2.46 per cent, respectively, paring back gains and continuing to hover around record lows.

Unabated momentum in these risk-free bonds underscores market scepticism about the effectiveness of PBOC's intervention, analysts said. The central bank said on Monday that it would borrow sovereign bonds from primary brokers in the open market "in the near future" to "maintain the stable operation of the bond market".

Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.

The move is seen as setting the stage for the bank to use treasury bond trading in the secondary market to adjust market liquidity and control the yield curve. However analysts suggested the intervention might only slow the rally temporarily, as current economic conditions do not warrant a major shift.

"The yields have been trending down for most of this year, mainly because the market is not so optimistic about the growth outlook," said Gary Ng, an economist at Natixis in Hong Kong. "The macro trend is that China's interest rates will continue to get lower to support the economy, and even the central bank finds it challenging to alter this trajectory."

The world's second-largest economy is still struggling to find a solid footing amid a long-running property downturn and waning global demand. The latest government data on Sunday showed factory activity in China contracted for a second consecutive month in June, reinforcing market concerns about the growth outlook.

Meanwhile, the property downturn and dismal performance of risky assets also increased the demand for risk-free debt instruments issued by Beijing, which has pushed yields to a two-decade low.

"Considering current inflation expectations are low-biased and investment returns have yet to pick up, the conditions for an upwards shift in the yield curve are still not in place," analysts at Huatai Securities said in a note on Tuesday.

There is also the possibility of the central bank further cutting interest rates to support the economic recovery, which would further pressure yields. PBOC's note buying could be more of a tool for liquidity management, and the scale of operations is set to be limited, they added.

"When the confidence has yet to come back, the money is making a conscious choice to flow into bonds," said Ng of Natixis. "Even with intervention, changing the incentive for investors seeking stable yield could prove challenging."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.