SHANGHAI (Reuters) -China’s central bank summoned some fund managers on Friday to warn them against chasing a fervid bond rally, two sources said, amid worries that a bubble in bonds might undercut Beijing’s efforts to revive growth and manage a depreciating currency.
Friday’s meeting is the latest in a string of warnings the People’s Bank of China has issued to banks and investment managers since last year.
One of the sources said such meetings between the PBOC and institutional investors have become more regular recently, occurring several times a week, as investors seek succour in the safety of bonds and bet on weakness in stocks.
The source, who works at a major mutual fund house, said that only fund managers with an “extremely passive approach toward bond investment” were safe from such summons, with the rest of the industry in the PBOC’s crosshairs.
Reuters could not gain further details about Friday’s meeting. The PBOC did not respond to a request for comment.
The sources declined to be identified as they were not authorised to speak to the media.
The pressure on fund managers comes as Beijing faces the daunting task of reviving consumption and the economy after a real estate crisis put a damper on growth. To add to its troubles, investors have taken fright as they worry about the impact on China of policies of Donald Trump’s incoming U.S. administration, especially its threat of tariffs.
Taken together, these problems have caused Chinese stocks to fall 4% in two trading sessions. On Friday, the yuan depreciated past a key 7.3 threshold to a 14-month low against the dollar.
Bonds have rallied. China’s 10- and 30-year government bond (CGB) yields, which move inversely to price, hit record lows on Friday before recovering somewhat as news of the latest meeting surfaced in social media.
Yields on the benchmark 10-year government bonds are now down a full percentage point since the beginning of 2024, trading around 1.58%.
A separate report in the Financial Times on Friday that China’s central bank is likely to cut interest rates from the current level of 1.5% “at an appropriate time” in 2025 gave markets further reason to push yields lower.
In a sign of extreme bearishness on the economy and deeply entrenched deflationary pressures, bond yields up to the 3-year tenor are trading below the short-term policy rate, the 7-day repo rate at 1.75%.
The central bank has said it will work on maintaining a normal upward-sloping yield curve, where long-term rates are above short-term rates. In August, it began buying and selling more bonds in the open market.
The PBOC’s warnings to financial institutions so far have not had the intended effect.
In mid-December, a central bank publication reported the PBOC had held meetings with some financial institutions which had engaged in aggressive bond trading activity and warned of zero tolerance towards bond market “misbehaviours”.
Separately, China’s interbank market regulator National Association of Financial Market Institutional Investors also said at the end of the year that it had held discussions with investors on the risks in the bond market and excessive expectations of monetary easing.
(Reporting by Reuters markets teams; Editing by Vidya Ranganathan, Paritosh Bansal and Susan Fenton)
