(Yicai) Jan. 10 -- The People’s Bank of China’s decision to temporarily suspend purchases of government bonds due to the short supply of the bonds does not mean that there will be quantitative tightening, rather the central bank is expected to take other measures such as trimming the reserve requirement ratio to ensure ample liquidity, experts said.

The central bank is suspending treasury bond purchases in the open market from this month, and will resume purchases at an appropriate time, depending on the supply and demand situation in the bond market, the PBOC said today.

The announcement led to a jump in the yield of major interbank bonds. As of 10 a.m., the yield on 10-year treasury bonds climbed 2.5 basis points to 1.65 percent, and the yield on 30-year bonds rose by 2.8 bps to 1.93 percent.

Buying treasury bonds is an important way for the central bank to inject liquidity into the market, but by pausing these purchases it does not indicate a tightening of liquidity, said Dong Ximiao, chief researcher at Zhaolian. Rather it is expected that the central bank will continue to maintain sufficient liquidity by injecting short- and long-term funds into the market through open market operations and by lowering banks’ reserve requirement ratio.

The central bank started buying treasury bonds in August last year to aid the countercyclical adjustment of monetary policy and maintain reasonable liquidity in the banking system. The amount steadily increased each month from CNY100 billion (USD13.6 billion) in August to CNY200 billion from September to November and reached CNY300 billion in December.

Central bank officials have repeatedly said that incorporating treasury bond trading into the monetary policy toolbox does not equate to quantitative easing. Instead, it is a channel for base money injection and a liquidity management tool, which can be flexibly combined with other tools to improve the accuracy of short-, medium- and long-term liquidity management.

Overdemand

In the past few months, investors’ growing appetite for treasury bonds has meant that demand has far outstripped supply. In the fourth quarter last year, the amount of treasury bonds issued jumped 15 percent year on year, whereas demand surged by almost 30 percent.

The yields on China’s medium and long-term bonds have fallen significantly in the past year, Guan Tao, global chief economist at Bank of China International, told Yicai. The central bank's suspension of treasury bond purchases will help ease shortages and balance supply and demand in the bond market.

Since last year, there have been large capital inflows into the bond market, causing interest rates to fall sharply, and leading to interest rate risks, investment institutions said at a symposium held by the National Association of Financial Market Institutional Investors on Dec. 30 to solicit the opinions of market players.

Due to the fear of missing out on trading opportunities, investors are strongly displaying "herd behavior," and regulatory authorities and self-regulatory organizations need to better manage expectations, they said.

Policies loosened after September, drawing more liquidity into the market, said Lian Ping, chairman of the China Chief Economist Forum. There are not many low-risk financial assets at the moment, so demand for government bonds is rising. There is therefore no need for the central bank to intervene as this is a form of adjustment.

If the supply of government bonds increases and the yield of long-term bonds returns to a reasonable level, the PBOC might start buying them again in order to once again infuse medium- and long-term liquidity into the market, said Feng Lin, executive director of the R&D department at Golden Credit Rating.

But now that the central bank has stopped purchases, the 10-year treasury bond yield may rebound sharply in the short term, Feng added.

Editor: Kim Taylor