China's efforts to curb bond market bubble highlight tensions with regional lenders

(MENAFN) In a bid to stimulate economic growth, the Chinese government is taking measures to discourage regional banks from heavily investing in high-risk government bonds, urging them instead to redirect their funds toward lending activities. In an unusual move aimed at curbing a potentially dangerous decline in bond yields and preventing a market bubble, China has begun naming and shaming banks involved in excessive bond purchases. The China Interbank Regulatory Commission recently launched an investigation into four rural commercial banks, accusing them of "manipulating sovereign bond prices in the secondary market." This investigation is widely interpreted as a strong warning to smaller regional lenders, who have aggressively purchased government debt following the unexpected withdrawal of larger state-owned banks from these markets.

The tension between Chinese authorities and bond investors has been growing, as evidenced by the recent record lows in yields on 10-year sovereign bonds. The inverse relationship between yields and bond prices indicates mounting concerns over weak economic growth and deflationary pressures in China. While most countries welcome the surge in demand for their government bonds, China’s central bank has repeatedly cautioned against the formation of a bubble in the sovereign bond market. Regulators have specifically highlighted the risks posed by regional banks' appetite for long-term government debt, warning that this could lead to a crisis similar to the one experienced by Silicon Valley if yields were to rise suddenly. A bond trader from Jiangsu province revealed that the local branch of the People’s Bank of China had advised against buying bonds sold by state banks, placing blame on a few rural banks in Suzhou for their aggressive bond purchases.

The investigation and the central bank's warnings underscore the Chinese government's broader strategy to shift regional lenders' focus from passive investments in government bonds to more active participation in the lending market. On a recent trading day, major banks offloaded 22 billion yuan worth of long-term bonds, a significant increase compared to the previous week's daily average. This push to wean regional banks off government bonds is part of China’s efforts to stimulate the economy by ensuring that financial resources are channeled into lending rather than being tied up in potentially risky bond investments. The government's actions reflect the delicate balance it seeks to maintain between encouraging economic growth and preventing financial instability. 

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