Chinese regulators are reportedly keeping a close eye on the bond investments of regional banks, as they suspect that these institutions are speculating on securities as opposed to economy-boosting lending. Bloomberg reported that these authorities have asked rural lenders to submit information on their bond trading practices, major counter parties and the need for existing investments. The banks also must detail how they back smaller companies.
Chinese regulators looking at regional banking bond investments
These requests came after a fiery rally affected long-term bond yields, which almost plunged to a historic low. Although drops such as must fit the debt market, they can also stem the allocation of loans needed to brace the economy.
In an email to Bloomberg, the People’s Bank of China (PBOC) confirmed that it is evaluating bond market investments by rural financial operators. This central bank noted that the investigation was a routine attempt to guide institutions to support rural and small businesses in the interest of the economy.
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The head of China’s macro strategy at Standard Chartered PLC (STAN.L), Becky Liu, said that the PBOC is looking to boost the inflow of funds into the economy and limit speculation as smaller banks may not have the capacity to adequately manage the risks. She commented:
Given the lack of long-dated assets and very sticky liability costs, the tendency is for banks to extend duration to get higher yields and positive carry.
China’s year-on-year domestic loan growth increased by only 10.4% in January 2024, establishing an all-time low. The bond yield rally started to slow down on Thursday, 7 March 2024. Analysts, however, predict that demand will remain strong.
