There is a bubble in the Chinese government bond market — or so, at least, the People’s Bank of China would fervently like to believe. A bubble would be a worrying risk to financial stability. The existence of such a risk, however, is far more palatable than the plausible alternative: that bond markets are sending out an increasingly dire signal of concern about the prospects for China’s economy, the danger of deflation and the need for a change of course.
Over the past few weeks, the PBoC has been engaged in a strange mirror image of the quantitative easing campaigns conducted by many global central banks. Where others tried to push down long-term bond yields to stimulate their economies, the PBoC is battling to hold them up.
China’s 10-year yield dipped briefly below 2.1 per cent last week, after sliding all year, before PBoC action pushed it back up again. The authorities have gone so far as to name and shame a group of rural banks for buying government bonds — a most unusual sin, like punishing a child for tidying their bedroom.