MNI: PBOC Seen Resuming Bond Purchases As Gov't Issuance Rises

The People’s Bank of China is likely to resume its bond purchases later this year to support government issuance and ensure ample liquidity, while also expanding the scale of its outright reverse repo operations to reduce borrowing costs for lenders and ease pressure on their margins from lower interest rates on deposits, advisors and economists told MNI. 

The central bank is expected to restart purchases in August, as the priority for monetary policy turns to credit expansion from its previous focus on bond yield risk, and as net issuance of government bonds is set to increase into Q3, said Wang Qing, assistant research fellow at the Institute of Finance and Banking, Chinese Academy of Social Sciences. (See:MNI: PBOC To Increase Bond Buying, Fiscal Coordination In 2025)

The resumption of bond-buying should guide rates downwards, lower borrowing costs for lenders and enable them to increase loans, said Wang, also a researcher at the National Institution for Finance and Development. 

But a policy advisor familiar with PBOC operations told MNI that while the central bank would resume purchases to support an increase in government bond issuance, which will peak from later in June and through to Q3, it would be wary of allowing yields to fall to levels which suppress investor demand or prompt systemically risky speculation. 

While the 10-year treasury yield remains above 1.60%, yields are already relatively low, and the PBOC will have to be careful about purchase volumes and should concentrate on one-to-five-year maturities, the advisor suggested, adding that local government debt should also be included in the operations over the longer-term.

The PBOC has already included local government bonds as eligible collateral for its reverse repo operations, a move which Wang said had helped improve liquidity and reduced financing costs for local governments, better enabling them to do their bit to boost the economy. 

The Bank suspended its bond purchases in January when market speculation over policy easing sent the 10-year CGB yield sliding to a record low at 1.60% in January from 2.0% in November, flattening the yield curve. However, in its latest Q1 Monetary Policy Report in May, the Bank stated it would resume operations “when market conditions permit”, noting it would “pay close attention to changes in treasury yields.” 

OUTRIGHT REVERSE REPO

The PBOC last Friday unexpectedly announced CNY1 trillion in outright 91-day reverse repo operations, lowering wholesale interest rates in the interbank market this week. 

Dong Ximiao, chief researcher at Merchants Union Consumer Finance, said the move was aimed at improving interbank liquidity and alleviating pressure on lenders’ net interest margins, with June a seasonal peak for credit issuance.

It also came as banks faced record maturities of negotiable certificates of deposit (NCDs), a key interbank funding tool, noted Wang. According to Wind, June's NCD maturities are projected to reach CNY4.2 trillion, a monthly record 

Introduced in October 2024, the outright reverse repo has enabled the Bank to conduct more timely and targeted control of market liquidity, Dong said, predicting the outright reverse repo would substitute for maturing Medium-Term Lending Facility loans, which are more expensive.

The PBOC may have to expand the scale and frequency of its outright reverse repos should deposit rates continue to decline and lenders face persistent liability-side pressures, Wang said, (See MNI: PBOC To Expand Tools, Cut RRR As Fresh Bonds Hit Market)

The policy advisor noted that the central bank has flagged a clear stance of shoring up banks short- and medium-to-long-term funding needs. If banks' funding demand increases further in June, it is possible that the PBOC will again conduct an outright reverse repurchase later this month, he added.