China’s regional banks are under fresh scrutiny from regulators for snapping up treasury notes amid an extended rally in Chinese government bonds that’s drawn alarm from the central bank.
The National Association of Financial Market Institutional Investors, a regulatory body backed by the People’s Bank of China, said Wednesday that it’s investigating four rural commercial banks in eastern Jiangsu province for potentially manipulating government bond prices.
The following day, the association said it had reported some small and medium-sized financial institutions to the central bank for breaking bond trading rules.
The move marks the latest efforts by authorities to tame a red-hot bond market and comes shortly after China’s benchmark 10-year government bond yield dropped to a fresh low at one point on Monday, prompting big state lenders to sell billions of treasury notes in a bid to cushion against further declines.
China’s major banks sold more than 60 billion yuan worth of government bonds, or about $8.4 billion, during the first two days of the week, state-run media outlet Cailianshe reported Wednesday. However, investors have continued to snap up sovereign notes, with rural commercial banks loading up on roughly 32 billion yuan of bonds in those two days.
Smaller lenders, especially those tasked with supporting less developed areas, have been some of the most aggressive buyers in the bond rally. Facing squeezed profit margins amid tepid borrowing demand from Chinese households and corporates, the more vulnerable rural lenders have been turning to long-term bonds in recent years.
That’s led to warnings from the central bank, which has expressed concern about a potential bond market bubble and financial instability. PBOC officials had recently told rural lenders in Jiangsu to stop buying government bonds on a large scale, the state-run Securities Times reported Thursday.
It remains to be seen if major banks’ bond selling can continue, as signs emerge that they might be running out of ammunition.
Citing an unnamed trader, the state-run Shanghai Securities News reported on Thursday that one big bank almost defaulted on its bond sales on Tuesday afternoon.
The newspaper also quoted Tan Yiming, chief fixed income analyst at Minsheng Securities, as saying that the PBOC’s concerns around the risk of an overheated bond market should not be underestimated.
It’s not just banks that have fallen under close scrutiny. Chinese regulators have also recently required mutual funds companies to limit the duration of their new bond funds to two years, state media reported Thursday, citing unnamed sources. The cap would further restrict funds’ investment in long-dated bonds, analysts say.
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