China’s Central Bank Stops Buying Bonds as Deflation Fears Grip Economy

In a striking sign of the Chinese economy’s stagnation, the central bank said on Friday that it had temporarily stopped buying government bonds.

The central bank’s unexpected action is aimed at braking a recent shift by investors toward purchasing bonds while shunning riskier assets like stocks and real estate. That shift has driven China’s long-term interest rates to a record low.

The decision to stop buying government bonds is especially unusual because interest rates have been rising lately in most of the world, in response to inflation fears. The concern about the Chinese economy is the opposite: chronically low inflation that is a hallmark of stagnation.

In China, much of the public has lost confidence as housing prices and stock markets fall steeply. Households have sought safety by pumping record sums of money into deposits at the country’s state-owned commercial banks, despite earning measly interest.

The banks, in turn, have struggled to lend these deposits to businesses. Many companies, pessimistic about the economy, are reluctant to borrow. Stuck with ever-rising deposits, the banks have invested the money in bonds.

This has driven up the price of bonds, which drives down the interest that bonds yield.

By temporarily suspending its own purchases of government bonds, the central bank is removing one source of demand for bonds. That could slow the rise in bond prices and decline in interest rates.