The headquarters of the People's Bank of China in Beijing Photo: IC
China's central bank's decision to suspend treasury bond purchases in the secondary market and instead using other tools to inject market liquidity will prevent disruptions to investors' allocation needs, mitigate supply-demand imbalance and help iron out market volatility, Zou Lan, an official with the People's Bank of China (PBC), the central bank, said on Tuesday.
Zou made the remarks after the PBC announced on Friday that that it has decided to suspend treasury bond purchases in the open market.
The central bank said that the move was made as demand exceeded supply in the treasury bond market lately, adding that bond purchases will be resumed at a proper time in accordance with market supply and demand changes.
Zou noted that treasury bonds represent national credit. If held to maturity, one will definitely receive the principal and the agreed coupon interest, without credit risk. Therefore, treasury bonds are broadly deemed a fairly safe asset.
However, since the coupon rate of the long-term treasury bonds is fixed, changes in the market's expected interest rates will cause fluctuations in bond prices of the open market, and sometimes the fluctuations could be large, making treasury bond investments subject to growing market risks, Zou said.
The development of China's bond market has been relatively short and has not experienced significant turmoil, and many investors, including managers and the general public, remain unfamiliar with the market risks associated with the high returns of government bonds. The PBC has strengthened macro-prudential management, repeatedly warned about market risks and reinforced market supervision, Zou said.
The PBC suspended bond purchases in the secondary market amid reduced bond issuance in the primary market, and turned to other tools to inject market liquidity. The approach aims to avoid affecting investors' needs, mitigating supply and demand contradiction and market volatility, with the goal of promoting bond market stability and long-term sustainability, Zou noted.
Since 2024, the Chinese economy has been recovering amid fluctuations, especially since September, with a noticeable improvement in market expectations and social confidence. The economy is expected to achieve the annual growth target of around 5 percent. The improvement in economic expectations will be reflected in the levels of treasury bond yields, Zou said.
Global Times