Central Bank Inspects Lenders’ Bond Holdings to Mitigate Risks

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China’s central bank has decided to borrow bonds from some dealers in order to maintain the steady operation of the bond market

China’s central bank has launched an inspection into the bond investment practices of smaller lenders to mitigate risks during an unprecedented bond rally.

A number of city commercial banks and rural commercial banks in Zhejiang, Fujian, Beijing and other regions have been ordered by the People’s Bank of China (PBOC) to submit data relating to bond investments up to the end of June, multiple sources have told Caixin.

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China's central bank is inspecting bond investments by smaller lenders to manage risks during an ongoing bond rally.
The focus includes examining outstanding bond positions, holding structures, leverage, and yield levels, especially for bonds with maturities over five years.
The central bank aims to recalibrate bond investment strategies to prevent risks similar to the Silicon Valley Bank collapse, partly due to long-term bond yield reductions and weak loan demand.

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Who’s Who

Yuekai Securities Co. Ltd.: Yuekai Securities Co. Ltd. is a securities firm that has provided analysis on the potential risks facing smaller Chinese banks due to their exposure to long-term bonds. In a report, analysts from Yuekai concluded that the People's Bank of China's measures aim to prevent risks similar to the collapse of Silicon Valley Bank, which faced massive losses from a sudden drop in the value of long-term assets.

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What Happened When

April 2024：: A central bank official cautioned banks, insurance companies, and other investors about the risks of locking substantial funds in long-duration bonds with low yields.

June 2024：: City commercial banks accounted for 9.19 trillion yuan in bond trading on the secondary market, marking a 1.9 trillion yuan increase from June 2023.

June 2024：: Rural commercial banks and cooperative banks traded 7.55 trillion yuan, a year-over-year rise of 1.48 trillion yuan.

Before the end of June 2024：: The People’s Bank of China (PBOC) ordered city commercial banks and rural commercial banks in Zhejiang, Fujian, Beijing, and other regions to submit data relating to bond investments.

By July 1, 2024：: The central bank announced a plan to borrow treasury bonds from primary dealers to “maintain the stable and healthy operation of the bond market.”

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