The People’s Bank of China has declared that it will cease its bond purchases in order to mitigate the declining Yuan in response to the increasing demand for government bonds.
The People’s Bank of China (PBOC) issued a statement on January 10th that indicated the central bank had suspended its purchases of government bonds due to the fact that the supply of the bonds was still inadequate to meet the demand. After conducting an accurate assessment of the supply and demand of government bonds, the PBOC announced that purchases would resume.
The central bank’s decision resulted in a substantial increase in the yields of Chinese bonds. Rumours also circulated that the central bank’s decision was intended to prevent the yuan from losing further ground. In September, the Chinese government initiated bond purchases to facilitate the yuan’s growth and to relieve the country’s monetary policies.
A CNBC report identified the expanding discrepancy between the yields of U.S. and Chinese bonds as one of the factors contributing to the yuan’s depreciation over the past year. The Chinese bond yields have decreased by approximately 100 basis points in the past year, now below 1.6%, according to the report. The disparity has consistently increased in comparison to U.S. bond yields, which have been at an approximate 4.7%.
A recent report from TradingView further underscored that the yuan had reached a 16-month low at the start of the week, trading below 7.3 CNY per dollar. Furthermore, the report noted that investors were increasingly concerned about the currency’s stability, despite the central bank’s efforts to address the issue. At the 16-month nadir, the yuan was 5% lower than its apex in September.
The 10-year and 30-year bond yields have increased by approximately 4 and 8 basis points, respectively, since the temporary halt in bond purchases. The CNY experienced a 0.1% increase before falling to 7.3469 CNY per dollar.
Huang Xuefeng, the research director of Shanghai Anfang Private Fund Co., predicted that the bond yields would persist in their downward trajectory despite the central bank’s efforts. Xuafeng clarified that the country lacked superior investment options, which investors were seeking.
Hui Shan, the chief economist of Goldman Sachs China, expressed a similar sentiment, stating that investors were less optimistic about long-term bond growth and inflation. Shan proposed that the negative sentiment could result in additional declines in the yields of government bonds.
Zhiwei Zhang, the chief economist at Pinpoint Asset Management, also stated that the PBOC’s recent decision to cease bond purchases was indicative of the government’s growing concern regarding the potential for bond yields to decline further. Zhang speculated that the PBOC’s intention was to prevent the yuan’s further decline from being influenced by bond yields.
The PBOC has proclaimed its intention to implement fiscal policy changes that are “moderately permissive” in order to stabilize the yuan and stimulate economic growth in China. For the first time in 14 years, the PBOC considered the phrase “moderately permissive” when discussing the policy change. There have been housing crises, low domestic consumption, and decreased exports in the country.
According to a report by Reuters, China’s central bank is making efforts to stabilize the economy in anticipation of President Donald Trump’s re-entry into office on January 20. One of the nations that will be subject to the most severe tariffs proposed by Trump is China.
In addition to any existing tariffs, President Trump has pledged to impose an additional 10% tariff on products from China. The U.S. president stated on Truth Social that the tariff increase would obstruct the importation of Fentanyl from China into the United States. During his campaign, Trump had pledged to increase tariffs on China’s imports to 60% or higher.
In anticipation of Trump’s inauguration, the Chinese government is increasing its gold purchases. As of December, China has amassed more than 330,000 gold troy ounces, with additional purchases anticipated prior to January 20.
Additionally, the PBOC intends to introduce an additional quantity of RMB bills into the Hong Kong market on January 15. China was to release RMB60 million of 6-month bills into the market, according to a tender letter from the Hong Kong government. On January 17, the PBOC will resolve the tender.
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