PBOC Inks Bond Borrowing Agreements w/ Financial Institutions; Stanchart Thinks PBOC Sending Clear Signal to Mkt

　　According to Bloomberg, the People's Bank of China (PBOC) has signed bond agreements with a number of financial institutions, with several hundred billion RMB of medium- to long-term government bonds currently available for lending. The PBOC will use an open-ended, credit-based approach to borrow government bonds, and will continue to borrow and sell government bonds depending on the bond market's operations.

　　Liu Jie, Head of Macro Strategy at Standard Chartered China, said the agreement between the PBOC and major banks on bond lending will allow the central bank to tap into the large amount of “held-to-maturity” government bonds of state-owned banks and strengthen the PBOC's ability to manage these long-dated bonds in the secondary market.

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　　Liu believed PBOC's proactive response to Bloomberg's enquiry demonstrated its strong intention to send a message to the market that it has a strong ability to anchor long-term bond yields and that it can do more if necessary. Stanchart believed that the central bank is still targeting long-term yields of 10- to 30-year bonds while taking a “hands-off” approach to shorter-term bonds.

　　Liu continued that the signing of the bond borrowing agreements does not mean immediate action. However, when the PBOC does act, it may need to find a way to neutralise the liquidity impact, such as by lowering the required reserve ratio.

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