(Yicai) Oct. 29 — The People’s Bank of China has restarted its government bond trading operations after an almost 10-month pause, a move that has calmed the bond market but also lowered the likelihood of a further cut in the reserve requirement ratio before year-end, according to analysts.
The resumption signals regulatory approval of current interest rate levels in the bond market, said Yang Yewei, a fixed income analyst at Guosheng Securities. Absent changes in fundamentals, this implies that the risk of further bond rate increases from here is limited and bond market stability has improved, Yang said.
PBOC Governor Pan Gongsheng announced the central bank’s intention to restart treasury bond trading on Oct. 27. The PBOC stopped earlier this year after buying a net CNY1 trillion (USD140.6 billion) in government bonds from the time it first started last August.
“Considering the substantial supply-demand imbalance and the build-up of bond market risks, we suspended government bond trading operations earlier this year,” Pan said. “Now that the bond market is running well overall, we will resume open-market government bond trading operations.”
The PBOC’s aim is to release liquidity through direct bond buying and steady market expectations, the analysts said, noting that this could act as an alternative to lowering the RRR, or the percentage of deposits banks must hold in reserve as cash.
The trading restart lowers the odds of another RRR cut this year to inject liquidity into the economy, as funding is already broadly loose, Yang noted.
Given that achieving this year’s economic growth target looks attainable and external headwinds have eased, policymakers may put off taking big steps such as RRR or interest rate cuts to retain the scope for future contingencies, said Liu Yu, chief economist at Huaxi Securities.
Meanwhile, the PBOC’s bond buying can ease the bond-holding pressure on commercial lenders and deliver effects comparable to an RRR cut, supporting market stability this quarter, Liu added.
All treasury bond futures closed higher yesterday. The most-actively traded 30-year contract ended 0.6 percent higher at CNY115.96 (USD16.34), the 10-year contract closed up 0.3 percent at CNY108.42, and the five-year and two-year contracts closed 0.2 percent and 0.08 percent higher.
The PBOC’s treasury bond trading supports the real economy, helps align monetary and fiscal policy, and stabilises the liability side of banks, said Sun Binbin, chief economist of Caitong Securities.
It also responds directly to the guidance from the Fourth Plenary Session of the 20th Central Committee of the Communist Party of China to maintain and step up economic policy efforts as appropriate, Sun pointed out.
Editor: Martin Kadiev