In a significant development, the People's Bank of China (PBOC) announced on January 10, 2025, that it has halted government bond purchases. This decision aims to cool down the market and address the downward pressure on the yuan, which has recently hit its weakest point against the U.S. dollar in over a year [7a184a02]. The PBOC's bond buying program, initiated in July 2024, was part of its broader strategy to inject liquidity into the financial system and stabilize economic growth [7a184a02].
This move comes on the heels of the PBOC's earlier monetary policy overhaul, which included plans to cut rates from the current 1.5% and stabilize the average reserve requirement ratio at 7.6% [21ff9423]. The central bank's actions reflect a response to the rapidly declining bond yields, with China's 10-year bond yield reaching a record low of 1.64%, compared to U.S. yields at 4.68% [7a184a02]. Analysts, including Larry Hu from Macquarie, have expressed concerns about the potential financial risks associated with these rapid declines in bond yields [7a184a02].
On January 14, 2025, Xuan Changneng, deputy governor of the PBOC, announced that the bank will implement comprehensive measures to lower overall bank debt costs and alleviate net interest margin (NIM) pressure. This initiative aims to balance the health of the banking sector's balance sheets with reduced financing costs for the real economy [6e6a7a38]. The PBOC also emphasized the importance of maintaining the RMB exchange rate at a reasonable level and accelerating the replenishment of banks' capital [6e6a7a38].
In December 2024, the PBOC had already injected 1.7 trillion yuan (approximately US$233 billion) into the financial system, which included 1.4 trillion yuan in reverse repurchase agreements. This liquidity support was crucial as the central bank faced ongoing trade tensions and deflationary pressures [466b912f].
The halt in bond purchases is expected to stabilize yields and support the yuan, which is currently trading at 7.2994 against the U.S. dollar, having declined by 2.92% since the beginning of the year [f4628aa4]. As part of its strategy, the PBOC plans to auction 60 billion yuan in six-month bills in Hong Kong on January 15, 2025, signaling its ongoing engagement in managing market dynamics [7a184a02].
Governor Pan Gongsheng has emphasized the need for a stable yuan exchange rate to restore confidence in domestic markets. The PBOC's recent decisions will be closely monitored by investors and analysts, particularly regarding their impact on domestic demand and the overall economic recovery [f4628aa4]. With President Xi Jinping targeting a 5% annual growth rate, the effectiveness of these monetary policies will be critical in navigating the current economic landscape [21ff9423].