China’s c. bank move aims to ease bond market pressure

China’s central bank decision to lower collateral requirements for medium-term lending facility (MLF) is expected to alleviate a shortage of bonds in the market, state media reported on Tuesday.

The People’s Bank of China (PBC) announced on Monday that it would reduce the collateral requirement for the MLF loan, a move aimed at increasing the supply of tradable bonds.

This comes amid a prolonged rally in China’s sovereign bond market that has prompted concerns about a potential bubble.

The balance of outstanding MLF loans currently surpasses seven trillion yuan ($962.44 billion), with government bonds and local government debt serving as the primary collateral.

According to the official Securities Times, citing a source close to the central bank, financial institutions may opt to sell long-term bonds following the change in collateral requirements, thereby easing the “asset famine” in the bond market.

Market analysts believe this move will also contribute to maintaining an upward-sloping yield curve, a goal that PBC officials have been emphasising.

Earlier this month, the central bank revealed it held hundreds of billions of yuan worth of bonds that could be sold to cool the bond market rally.

In a surprising move on Monday, China cut both short-term and long-term interest rates, marking the first broad-based rate reduction since August of last year.

This action signals the government’s intention to stimulate growth in the world’s second-largest economy.

Attribution: Reuters