International

China Regulator Said to Ask Some Banks to Cut Back Bond Risk

(Bloomberg)

(Bloomberg) -- China’s financial regulator asked some rural lenders to shorten the average duration of their bond holdings, according to people familiar with the matter, as authorities seek to safeguard the banking sector amid a relentless rally in the debt market.

Local branches of the National Financial Regulatory Administration looked into banks’ bond investments among other things during their monthly checks, said the people, who asked not to be identified as the matter hasn’t been made public. The move followed a similar request made by the central bank, the people said.

Last week, the People’s Bank of China said it has “hundreds of billions” of yuan of securities at its disposal to sell in order to cool the rally. The bond surge has been fanned by concern over the world’s second-largest economy and a lack of alternative investment opportunities onshore, and an increase in sovereign debt sales has failed to slow it.

The slump in yields has become a cause of concern for policymakers who fear a possible bubble forming in the market and losses for investors should they rebound sharply in the future. 

PBOC Governor Pan Gongsheng said in June the central bank is monitoring bond investments by non-bank financial institutions closely as those who hold large amounts of medium- to long-term bonds could face interest-rate risks. Duration is a measure of the sensitivity of a bond to changes in interest rates.

Central banks should learn a lesson from the collapse of the Silicon Valley Bank and correct any increase in financial market risks in a timely fashion, he said. The NFRA didn’t immediately reply to a request for a comment.

“It is believed to be part of the policy reactions to cool down the hot speculation on long-dated yields recently,” said Zhaopeng Xing, senior China Strategist at ANZ Bank China Co. 

Xing continues to see a floor of 2.25% for China’s 10-year yield. That matches the level forecast by market watchers in a Bloomberg survey which may prompt the PBOC to sell bonds.

China’s benchmark 10-year yield was little changed at 2.26% on Thursday, not far off its 2.18% record low. 

(Updates with ANZ comment and bond yields in last three paragraphs.)

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