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A rally in Chinese government debt has sparked alarm among regulators in Beijing, who warn that regional banks’ appetite for the bonds risks a crisis similar to the collapse of Silicon Valley Bank last year.
The People’s Bank of China, which regulates the financial sector, has signalled its discomfort over the scale of the banks’ move into long-dated sovereign bonds, which are vulnerable to moves in interest rates — as was SVB’s portfolio of US Treasuries.
In the first quarter of this year, net purchases of such bonds by Chinese banks, overwhelmingly by regional lenders, totalled Rmb270bn ($37bn), according to securities market data analysed by BNP Paribas.
“If a large amount of funds are locked in long-term bonds with low yields, and if the cost of the liability increases significantly, the funds will be caught into a passive situation of sizeable drawdowns from a sharp repricing,” a PBoC official told the state-owned Financial News this week.
“This is exactly what caused the liquidity crisis of . . . Silicon Valley Bank last year.”
SVB was taken over by the US government in March 2023 after a run on the bank triggered by fears it would be unable to honour its deposits because of the impact of rate rises on its holdings of long-dated US Treasuries. At the time, it was the second-largest bank failure in US history.
China is grappling with a slow-burn crisis in its huge property sector, historically the focus of much of the country’s investment, which has spilled over into the stock market as economic growth has faltered.
Problems among the country’s host of regional banks could exacerbate the difficulties of the world’s second-biggest economy by restricting lending at a crucial time.
The regional banks have been piling into long-dated sovereign bonds since January as a haven from the troubles of equities and the real estate sector, driving government borrowing costs to their lowest level in decades.
But some analysts warn of the dangers posed by apparently safe government debt.
“For the smaller lenders, it’s actually risky for them to chase longer-dated [debt],” said Wang Ju, the head of greater China foreign exchange and rates strategy at BNP Paribas Securities. “If something goes wrong and the yield starts to rise, the . . . loss can be big. Don’t forget the lessons of the regional banks like SVB in the US.”
In an indication of the strength of demand for long-dated government debt, China’s 30-year bond yield, which moves inversely to prices, fell to about 2.5 per cent this week, its lowest level in two decades.
Ten-year yields hit a record low of 2.2 per cent in March. It steadied after repeated warnings from officials.
In some eastern and central provinces, local banking regulators have told smaller lenders to stop adding to their holdings of long-dated debt and have warned them against the liquidity risks, according to domestic media reports.
Despite the government steps, rural banks still bought Rmb400bn worth of sovereign bonds between March 1 and April 16, secondary trading data from China’s interbank bond market showed.
By contrast, Chinese mutual funds purchased much less during the period — Rmb78bn — while larger Chinese banks sold Rmb220bn of their holdings of the bonds.
“Smaller banks in particular are more aggressively investing into government bonds compared to their larger rivals,” said Chen Jianheng, chief fixed-income analyst at the research department of CICC.
Chinese officials are still haunted by a 2016 bust in the country’s bond market.
The PBoC official hinted to Financial News that Beijing could step up bond issuance in an effort to limit the rally while intervening in the secondary market to help manage liquidity.
Premier Li Qiang said in March that the country would issue Rmb1tn of ultra-long special central government bonds this year to help support the economy.