(Bloomberg) -- Chinese rural banks in a number of regions have been advised to limit their exposure to ultra-long sovereign bonds, a move that may lead to unwinding of the recent rally in these securities.

Lenders in at least four provinces in the eastern and central regions have received guidance from local industry unions to cap ultra-long bond holdings, according to people familiar with the matter, who declined to name them as the information is private.

In one eastern province, banks have been advised to sell bonds with maturities of over 10 years, especially the 30-year ones, said some of the people. 

Lenders in one central province have been told to refrain from adding ultra-long bonds, other people said. The guidance may be adjusted according to changes in market conditions, they said. 

These warnings from industry unions highlight the growing anxiety among China’s debt investors facing a potential supply shock from the government’s planned 1 trillion yuan ($138 billion) special bond sale. 

Provincial credit unions are in charge of rural commercial banks and cooperatives in the region, equivalent to regional headquarters to the branches.

China’s 30-year sovereign yields dropped at the fastest pace in four years in the last quarter, with the buying spree starting to fade in recent weeks amid a weak yuan and fears of regulatory scrutiny. The nation’s central bank said at a recent monetary policy meeting that it will monitor for changes in long-term yield amid signs of an economic recovery.

The small rural banks have been among the most aggressive group of buyers for sovereign debt in the past two months, according to analysts. Policymakers in early March stepped up checks over regional banks’ bond investments and urged them to focus on core business of supporting small firms, rather than speculating on these securities.

China boasts a vast network of about 3,800 rural lenders, including commercial banks and cooperatives. Their assets totaled 54.6 trillion yuan — or 13% of the entire banking system — at the end of 2023, according to official data. 

©2024 Bloomberg L.P.