Why China's central bank has stopped bond purchases

BEIJING — The Chinese central bank halted its government bond purchases Friday in an attempt to slow a one-way bonds trade that's put unwanted downward pressure on the yuan, analysts said.

China's 10-year bond yield plunged to a record low this month, while the Chinese currency traded in Hong Kong on Wednesday hit its weakest against the U.S. dollar in more than a year.

The People's Bank of China is "trying to cool down the market by suspending gov[ernment] bond buying," said Larry Hu, chief China economist at Macquarie.

The decision "suggests that the PBOC is concerned about the recent rapid decline in bond yields, as it will increase CNY depreciation pressure now and SVB-style financial risk in the future," Hu said, referring to the major U.S. bank failure in 2023 that was largely blamed on shifts in capital allocation due to aggressive Federal Reserve rate hikes.

The PBOC announced before the market open Friday it was halting its government bond purchases.

The PBOC's bond buying program didn't really begin until last year. PBOC Governor Pan Gongsheng said in a high-profile speech in June that the central bank would gradually add buying and selling government bonds on the secondary market to its monetary policy toolbox.

"The PBOC may be attempting to signal to all market participants that rates have come down too low and too fast," said Peter Alexander, founder of Shanghai-based consulting firm Z-Ben Advisors. "Their stepping away should lead to a rise in rates at least for the short term."

"The immediate impact has been a small move of yields higher. However, we expect this impact to be relatively short-lived if the PBOC is only pausing rather than defending a specific yield target like they did last year; the factors