Investments in government bonds are not without risk, a Chinese central bank official said Tuesday, warning of a possible market bubble and resulting turbulence if yields drift away from economic fundamentals.
The rapid decline in Chinese bond yields has complicated Beijing’s efforts to stabilize the weakening yuan, with the People’s Bank of China suspending bond purchases in January, a move seen by investors as an attempt to prevent yields from touching new historic lows.
“If long-term bond yields fail to accurately reflect economic fundamentals, or if there are large changes in supply and demand… a spiral effect could be formed by redemptions and larger losses will occur in the short term” , Zou Lan, head of the Chinese central bank’s monetary policy department, said at a news conference in Beijing.
China’s central bank has stepped up macroprudential management, issued risk warnings, suspended bond purchases and started using other liquidity tools to avoid “exacerbating supply-demand tensions and market fluctuations,” he said. Zou stated.
However, Zou’s comments had little impact on trading, with Chinese 10-year and 30-year bond yields falling 3.25 and 4 basis points respectively on Tuesday.
Amid strong global bond selling, the trend could further widen the gap between Chinese and U.S. debt yields, adding further unwanted pressure on the yuan, traders and analysts said.
At the same press conference, Xuan Changneng, vice president of the People’s Bank of China, reiterated that China will continue to take measures to stabilize the yuan at reasonable and balanced levels.
“The goal of maintaining the basic stability of the yuan exchange rate will not change,” Xuan said.
“We have the confidence, conditions and capacity to resolutely achieve the objective… we will correct pro-cyclical market behaviors, address behaviors that disrupt the market order and avoid the risk of an exchange rate overshoot.”
Xuan said China will also adjust and improve the strength and pace of policy implementation to achieve its economic and social development goals for the whole year.
Source: Terra
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