China has a bond vigilante problem – Asia Times
Xi Jinping, the president of China, is competing with much success to convert stock bears to bulls. However, China has the same issue with foolish joy pushing long-term yields very low in the bond industry.
Officials are now trying to control the third-largest federal loan market in the world. On Monday, prices tumbled as the People’s Bank of China ( PBOC ) intervened assertively in the market. It was the worst moment in 17 times for China’s 10-year government prospects, sending yields up 4 base points.
At the same time as Xi favors a stable-to-firmer trade price, bond prices have recently fallen. The issue with Xi and the PBOC is that bond bull claim that the rally is supported by basics like negative forces and slowing growth, and that it still has room to grow.
Beijing’s regulators have constantly aimed to increase the volume of immediate funding. When combined with bonds and stocks, it made up only 31 % of the cultural finance overall last month, with bank loans accounting for the rest.
In the US, by contrast, the number is more than 70 %. China’s Communist Party intends to sell more long-dated sovereign bonds in order to aid efforts to accelerate progress in its US$ 17 trillion market.
PBOC Governor Pan Gongsheng issued a warning about bubble problems as wobbly stock prices flooded into bonds and walls of money flowed from weak stocks in recent weeks.
In July, flows from Chinese securities “are largely explained by the lingering problems that investors see in the Foreign economy”, said Jonathan , Fortun, an analyst at the Institute of International Economics.
It’s not all that surprising that Asia’s largest economy is experiencing significant domestic funding withdrawals. China’s direct investment liabilities, a balance of payments barometer of incoming foreign investment, fell by$ 14.8 billion in the second quarter year , on year, only the second time the figure has turned negative, according to Bloomberg.
The first-half of 2024 saw a decrease of$ 5 billion, which would be the first net outflows since 1990. As a result of trade tensions between the US and Europe, China’s possess additional investment is declining while these diminishing capital flows are occurring.
All of this has resulted in Pan’s PBOC stepping up efforts to combat the friendship cows. The problem, though, is that the merchants testing Beijing are increasingly looking like so-called “bond police”, or activist investors who often take matters into their own hands.
Pan’s crew is about to discover what James Carville had warned the world about 30 years earlier. In 1994, Carville was a planner for US President Bill Clinton and is best known for his “it’s the economy, idiotic” phrase. That year, Carville made another popular study: that he’d like to be reincarnated as the , bond , business because” You you scare everybody”, he quipped.
The framework was balanced-budget conversations in Washington. Back then, tie investors were sensitive to the slightest tilt in Washington’s fiscal path. Carville’s reference to the influence of relationship vigilantes is now the issue for China as continent assets are being priced by traders.
A “hopeful flip” is starting to appear about what the PBOC is doing, according to Bill Bishop, who writes the Sinocism email. The goal may be to stress organizations to reduce their exposure before a more immediate fiscal stimulus package that would raise provides. However, the desire to invest in these bonds does not indicate assurance in the economy or the prospects for different asset classes.
Officials in China’s Jiangxi province advised commercial banks this week against paying back their government bond purchases. It’s daring to encourage institutions to rely on trades in a bid to lower risk.
The issue is that this could undermine Xi’s slow economic growth. Trust in Chinese bonds was decline even further if counterparties in relationship trades worry that further transactions might go wrong.
Very often in recent years, Xi’s authorities intervened in investment and foreign exchange trading, turning off international money managers. It’s not surprising that foreign transactions are dumping money into China’s economy in unprecedented amounts as a result.
Since April, the PBOC has frequently warned the business about price risks, according to Becky Liu, mind of Standard Chartered’s China macro strategy. ” This time, they want to take a strong enough message to the market, to greater recognize their’ comfort’ level of long-dated bonds, to minimize potential theoretical positions”.
Pan even cited the Silicon Valley Bank collapse in the US in early 2023 in a June press release. The concern is that Chinese regional banks may become alarmed by bond yield movements that are unpredictable.
The SVB in the United States has taught us that the central bank needs to monitor and evaluate the state of the financial market from a macro-prudential perspective, Pan said. ” At the moment, we must pay close attention to the maturity mismatch and interest rate risks that come with the large holdings of medium and long-term bonds by some non-bank entities.”
Entities in potential harm’s way include insurance companies, investment funds and other financial firms. That’s particularly the case as China flashes some Japan-like warning signs.
” The property woes are causing the weak credit demand.” In consequence, banks are forced to purchase more bonds because the interbank market is where money is trapped, according to Larry Hu, chief China economist for Macquarie Group.
Just as in the case of Japan in the 1990s, says Ken Cheung, currency strategist at Mizuho Securities, low government bond yields can do more harm than good to an economy.
At least four Chinese brokerages put new restrictions on domestic government bond trading earlier this week. One even went so far as to halt dealing with certain maturities. This likely makes the threat of additional intervention” the main factor driving yields higher”
For now, the financial equivalent of” the sword of Damocles is falling”, says Tan Yiming, analyst at Minsheng Securities. Tan points out that “while the scale of any selloff , in China , bonds may not be substantial in the medium and long term due to the fragile growth momentum in China, chasing duration returns in China does not seem appropriate in our opinion.”
But risks abound going forward. With this so-called “asset famine” environment where high-yielding assets are in short supply persisting,” the , bond , bull market remains alive”, Tan says.
The concern for Xi and Pan is that the yuan would fall if the Chinese yields dropped even further. That could increase the risk of default for large property developers as they struggle to make payments on offshore bonds. Before the November 5 presidential election, where China has been a punching bag for both parties on the campaign trail, it may enrage US politicians.
Of course, China is n’t alone in fretting about bond vigilantes. The Bank of Japan is tussling with traders in Tokyo, which causes the yen to rise more quickly than Tokyo wants.
Meanwhile, the US’s record-breaking national debt, which is up to$ 35 trillion at a time of severe political dysfunction, could stoke the appetite of speculators.  ,
The concern is that bond vigilantes will make a comeback in a troubled time rather than use deficit spending, according to analyst Tan Kai Xian of Gavekal Research. Geopolitical tensions and attempts to “waffear the dollar,” which are making non-US allies consider diversifying away from Treasuries, have increased this risk.
China’s difficulties would be less somber if its capital markets were prepared for the world’s prime time. To build trust among global investors, Team Xi must accelerate moves to improve liquidity.
It needs to develop new hedging tools, reform a sizable and opaque state sector, create a top-notch credit-rating system, and increase transparency to lessen risk and facilitate a more advantageous allocation of capital. These and other actions are essential to boosting the yuan’s reputation as a leading currency in trade and finance.
Some of China’s largest state banks recently received advice from regulators to gather more information about the owners of sovereign notes. The idea is to tighten the leash on speculators. Officers are meeting with financial institutions at the PBOC’s branch in Shanghai to discuss bond market risks.
According to Citigroup economist Xiangrong Yu,” the PBOC’s concerns about financial risks are valid.” ” Whether its moves are sufficient to lift the long-end yield appears uncertain”.
Fundamentals may at this point support the PBOC’s desire to see lower Chinese yields. According to Pictet Asset Management’s analysts,” the lack of low-volatility investment opportunities should make Chinese government bond investments attractive for many investors, especially at a time when the country’s stock market is still under pressure and the economy recovers only slowly.”
It implies that more than a lot of people think, authorities may have a harder time taming the market.  , Though heady demand for China’s government bonds dovetails with Beijing’s long-term agenda, it’s colliding with PBOC efforts to support the yuan.
Overall, the recent flattening of the yield curve has hampered Pan’s policy flexibility, which has fueled renewed rumors that more monetary easing is on the horizon. This explains why the PBOC’s tug-of-war with bond vigilantes is only just beginning, and why China wo n’t have a chance to win.
Follow William Pesek on X at @WilliamPesek
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