The Chinese Central Bank tightens its approach: bond purchases are frozen

The People's Bank of China announced the suspension of purchases of government bonds to limit speculation related to the slowdown in economic growth, undermining the yuan and business confidence. According to the bank's representatives, there is a situation in the market in which the demand for bonds significantly exceeds their supply, and the resumption of purchases will depend on current market conditions. 

Bond yields declined significantly amid expectations of monetary policy easing to stimulate the economy. Investors began to actively invest in bonds amid the crisis in the real estate sector and the risk of deflation. However, after the PBC's statement, Chinese bond yields began to rise, and the yuan strengthened by 0.1%.

In recent months, the regulator has been actively buying government bonds, acquiring a net volume of 1 trillion yuan in five months. This activity began in August, with the launch of regular bond transactions with primary dealers. The yield on 10-year bonds recently reached a historic low of 1.60%.

Investors are showing unprecedented pessimism about the prospects for China's economy. Some even predict the possibility of a deflationary spiral. The situation is in stark contrast to the situation in the United States, where Treasury yields continue to rise due to strong economic growth. This difference strengthens the dollar's position and leads to a devaluation of the yuan, despite the efforts of the Chinese authorities to stabilize the exchange rate.