By Jiahui Huang


China's central bank has signed agreements with major brokers to borrow "hundreds of billions" of yuan worth of government bonds, a move analysts say is likely aimed at stabilizing plummeting long-term bond yields.

The People's Bank of China has started to borrow medium and long-term notes from lenders, state media said Friday, now holds "hundreds of billions" of yuan worth of bonds.

The central bank will borrow the bonds with no fixed term on an open-ended basis and sell them depending on market conditions, state media added.

The move comes after the PBOC said Monday that it will borrow treasury bonds from some primary dealers in the near future, without giving a specific timeline.

"The aim is clearly to shore up the long end of the yield curve," Capital Economics' head of China economics Julian Evans-Pritchard wrote in a research note.

Chinese government bonds have been on extended rally as a flight to safety fuels appetite for low-risk assets, pushing yields to multiyear lows. Structural concerns about China's economy have been a key driver behind risk-off sentiment, analysts say.

"China's leadership have long favored intervention to ensure a stable currency. They may now want the same for long-term yields," Evans-Pritchard said.

The 10-year Chinese government bond yield rose 0.01 basis points to 2.27% after the news on Friday, while the 30-year bond yield edged up 0.02 basis points to 2.51%.

Meanwhile, the 30-year Chinese government bond futures contract dropped 0.2% and the 10-year bond futures contract fell 0.05%, according to Wind data.

Whether any central bank intervention will lead to meaningful turnaround in long-term yields will depend on how much firepower it is willing to deploy.

Given that the PBOC holds less than 5% of the total stock of Chinese government bonds, it needs to borrow from the market first to bulk up its holdings if it wants to influence long-term yields, Evans-Pritchard said.

Capital Economics expects China's 10-year government bond yield to hold steady at around 2.20% between now and the end of 2025, the economist added.

Beyond aiming to put a floor on government bond yields, analysts think the central bank will likely wield other policy tools to shore up economic stability.

The PBOC "may eventually need to lower interest rates to support the economy and boost domestic inflation," Goldman Sachs analysts wrote in a recent note.


Write to Jiahui Huang at jiahui.huang@wsj.com


(END) Dow Jones Newswires

07-05-24 0112ET