China’s Central Bank Stops Buying Bonds as Deflation Fears Grip Economy

China's economy has been experiencing significant challenges, leading to a suspension of treasury bond purchases by the People's Bank of China (PBOC) on January 10, 2025. This move resulted in a jump in bond yields and has been interpreted as a strategy to stabilize the yuan, which has faced notable depreciation. The PBOC cited a shortage of bonds in the market as a reason for its halt, pointing to broader global selloffs in major bond markets that have put pressure on China's domestic yields. As the yuan reached a 16-month low, the bank's action indicates an effort to mitigate the widening yield gap between China and the United States. In response to market conditions, the central bank's suspension of bond purchases aligns with its aims to improve local yield rates amidst decreasing bond prices that have prompted investors to seek safer assets. The recent history of declining long-dated yields has raised concerns about potential bubble risks within China's bond market, which has enjoyed prolonged rallies over the past decade. Analysts have suggested that the abrupt halt in bond purchases signals a commitment from the PBOC to maintain market stability while addressing currency pressures. Furthermore, the PBOC has reassured the market that it would resume bond buying operations when appropriate, depending on market supply and demand. The decision to pause occurs just a few months after the PBOC had initiated bond buying measures to enhance liquidity management, reflecting the PBOC's balancing act between stimulating the economy and tackling currency depreciation. Economist Ken Cheung from Mizuho Bank addressed the situation, explaining that a key driver of the yuan's decline has been the widening yield gap when compared to that of the U.S., highlighting the potential ramifications on currency stability. The complex interplay between bond yields and currency valuations in China's unique economic landscape sets the stage for a challenging recovery period, as the PBOC looks to navigate through warning signs of economic fragility while ensuring the bond market sentiment is preserved.