China Takes a Fancy to Yield Control

Almost a decade after China loosened the shackles on its currency, authorities are trying to strengthen their grip on the bond market. Beijing hasn’t quite swapped one peg for another, but has developed a dim view of low long-term interest rates. The desire for greater influence over yields won’t come without a cost. Something will have to be sacrificed, or at least curtailed. That something is likely to be the scope to juice growth.

Officials have been signaling for months that they’re uncomfortable with the rally in government bonds. The yield on 10-year notes fell to a record 2.18% last week; those for 20 and 50 years have hovered around historic lows for months. The retreat largely reflects disappointment at the pace of economic growth and anemic levels of inflation. The price surge that accompanied the reopening of other economies was absent. China has the opposite challenge: fending off deflation. The reaction of investors to these underwhelming conditions is fairly textbook.

Less orthodox is the pushback. Rather than merely grumbling about yields, the central bank amassed the firepower to do something about it. The People’s Bank of China said on July 1 it will borrow debt from primary dealers with the intention of steadying the market, a decision made after “careful observation and evaluation.” A few days later, the PBOC revealed that it has hundreds of billions of yuan at its disposal. The idea appears to be that if yields drop too far, the central bank will signal displeasure by selling bonds to push rates up — or at least cushion the descent. Where might this line in the sand be? According to Gavekal Dragonomics, authorities are putting a floor under 10-year yields at around 2.2%.