SHANGHAI- China’s securities regulator has ordered some brokerages to inspect their bond trading activities, three people with knowledge of the matter said, as authorities seek to rein in frenzied buying of Chinese government bonds.
The brokerages, all of which are domestic, have been told to conduct compliance checks on all parts of their bond trading operations, said the people, of whom two had direct knowledge of the instructions.
They were not authorized to speak to media and declined to be identified. The China Securities Regulatory Commission (CSRC) did not immediately respond to a Reuters request for comment.
A wobbly Chinese economy, long hobbled by a protracted property crisis, has sent investors scurrying away from the volatile stock market while banks have also continued to cut deposit rates. That’s sent investors – from large banks and insurers to mutual funds to rural financial institutions – pouring into the bond market.
The central bank has repeatedly warned against reckless bond buying, worried about a potential bubble that could end up in a Silicon Valley Bank-style crisis.
Among other recent measures to cool the bond market rally, the CSRC asked major mutual fund companies to cap the duration of their new bond funds to two years, sources have said. The central bank has asked some financial institutions to report daily changes in their long-term treasury bond positions, sources have also said.
And this week, big state banks sold large volumes of Chinese government bonds, according to industry trading data and market participants who said the move was aimed at helping push up yields.
Regulators are “firing on all cylinders against bond market misbehavior,” said one of the sources with knowledge of the CSRC’s latest instructions.
The sources said some of the compliance checks were related to four rural commercial banks under investigation for suspected bond market manipulation.
The National Association of Financial Market Institutional Investors has named the banks as Changshu Rural Commercial Bank Kunshan Rural Commercial Bank, Jiangsu Suzhou Rural Commercial Bank Co and Jiangnan Rural Commercial Bank. All are based in Jiangsu province in China’s east.
The bond market rally began gathering steam late last year.
This week, China’s 10-year and 30-year government bond futures both hit record levels before paring gains. The 10-years are up 3 percent this year while 30-year bonds have surged 10 percent .
On Monday, 30-year treasury yields hit a record low of 2.29 percent , down 53 basis points since end-2023.
Earlier, China’s central bank said it will seek to “enrich” its monetary policy toolbox and will gradually increase buying and selling of treasury bonds in its open market operations.
PBOC will also seek to steadily lower companies’ financing and household credit costs, the report said, adding that prudent monetary policy should be “flexible, moderate, precise and effective.”
The PBOC will “guide credit to grow reasonably and balance the supply of credit while keeping liquidity reasonably ample,” said the report.
The central bank will pay attention to changes in long-term bond yields during economic recovery and said it will conduct stress tests on the risk exposures of bond assets held by financial institutions and prevent interest rate risks.
“It’s necessary to enrich the monetary policy toolbox, enrich and improve methods of monetary base injection, and gradually increase buying and selling of government bonds in the central bank’s open market operations,” the PBOC said.
The central bank will pay close attention to changes in the monetary policies of major overseas central banks, it added.
China’s economic growth missed forecasts in the second quarter, depressed by a property downturn and sluggish domestic demand, while some July economic indicators showed a mixed and unbalanced recovery.
The PBOC will also study plans to appropriately narrow its interest rate corridor and deliver clearer signals of interest rates adjustments to markets. The central bank last month launched temporary repo or reverse repos to make open market operations more efficient and keep the banking system liquidity ample.
On the Chinese yuan, the PBOC vowed it will prevent the formation and self-reinforcement of unilateral expectations and will guard against risk of exchange rate overshooting.
