The agreement between the People's Bank of China and major banks such as the Industrial and Commercial Bank of China (SHA:601398) and Postal Savings Bank of China (SHA:601658) on bond borrowing will lend "very strong support" to the central bank in managing long-term yields in the secondary market, Standard Chartered Bank (Hong Kong) said in a research note on Friday.
The move counters the view that the central bank's ability to influence the long-end of Chinese government bonds' yield curve is restricted due to its limited long-dated bond holdings, Standard Chartered's head of China macro strategy Becky Liu said.
The central bank's proactive approach, which includes a direct response to Bloomberg regarding the news, points to a "strong desire" to inform the market of its strong ability to support long-dated bond yields and make further steps if needed, Liu said.
Industrial and Commercial Bank of China and Postal Savings Bank of China held 15.4 trillion yuan of bonds in total as of end-2023, taking up 10% of all outstanding bonds in China's local market, according to Standard Chartered's calculation.
The banks' longer-dated holdings stood at 4.5 trillion yuan or 13% of all outstanding government bonds, the equity research firm said.
The move, which will allow the central bank to sell the banks' bonds in the secondary market, aims to prevent any significant mark-to-market losses as bond yields recover and support an upward-sloping yield curve to shield the banking sector's profitability, Liu said.
"The development will likely lead to a small rebound of long-dated bond yields in the short-term, and also set the floor of 10-30Y CGB yields in the near future, in our view," Liu said. "But it won't change the medium term trajectory of China rates - i.e. lower - due to economic and inflation fundamentals."
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