Chinese Bond Market Falters in Response to Regulatory Crackdown


The Chinese bond market is suffering amidst a crackdown by financial regulators which is shaking investor confidence.

Over the past eight trading days China’s mainstay 10 year sovereign bond, the T1706, has seen its price drop by 1.91%, while the yield for the 10 year 170010 is approaching 2.7%.

Yields on 10 year sovereign bonds have risen by over 100 basis points since October last year, and yield curves remain flat.

Analysts believe that the chief drive of rising yields on the Chinese bond market is pessimism in relation to intensifying scrutiny from financial regulators, as opposed to overseas or fundamental market factors.

This pessimism has recently been exacerbated by the People’s Bank of China’s decision to refrain from open market operations at the start of the week, which follows its decision at the start of May to discontinue 230 billion yuan in medium-term lending facilities (MLF).

These actions serve as emphatic signals of PBOC’s determination to continue with deleveraging and keep liquidity on an even keel.

By pushing up rates PBOC and narrowing the long and short term spread, PBOC is suppressing the potential for a bubble in bond markets, and keeping the yield curve flat.