China's bond buys may kill three birds with one stone
July 3 (Reuters) -The People's Bank of China may very soon participate in the secondary bond market, for the first time in 17 years, to address sliding government bondyields. That should stabilise bond prices, while possibly helping the stock market and even the yuan.
Domestic investors' rush into Chinese sovereign debt has been attributed to an 'asset famine', amid the stock market malaise.
Rising bond prices imply low confidence in China's economy and expectations of disinflation, contradicting the central bank's economic outlook. A prolonged disconnect between market pricing and policy pledgescould leave investors jaded, diluting the intended effect of future support measures.
Since verbal reassurances have failed to assuage investor doubt, and economic data has disappointed, the PBOC needs to use actions rather than words.
If the PBOC succeeds in cooling bond prices, it might push some investors toward other relatively safe assets such as dividend-yielding stocks, supporting broader Chinese equities.
The resulting rise in Chinesegovernment bond yields would also narrow the gap against U.S. Treasuries, reducing the appeal of selling the yuan for carry-trade strategies. Shoring up the yuan now wouldgive the PBOC leeway to allow weakness later to cushion the effect of potentially harsher U.S. trade tariffs.
Given the multiplepositive effects of the PBOC's planned foray into the bond market, it could happen even before the Communist Party's Third Plenum beginson July 15.
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Ewen Chew is a Reuters market analyst. The views expressed are his own. Editing by Sonali Desai
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