Exclusive-China tells some brokerages to conduct compliance checks on bond trading, sources say

1:26 pm Friday, August 09th, 2024

SHANGHAI (Reuters) -China’s securities regulator has ordered some brokerages to inspect their bond trading activities, three people with knowledge of the matter said, as authorities seek to rein in frenzied buying of Chinese government bonds.

The brokerages, all of which are domestic, have been told to conduct compliance checks on all parts of their bond trading operations, said the people, of whom two had direct knowledge of the instructions.

They were not authorised to speak to media and declined to be identified. The China Securities Regulatory Commission (CSRC) did not immediately respond to a Reuters request for comment.

A wobbly Chinese economy, long hobbled by a protracted property crisis, has sent investors scurrying away from the volatile stock market while banks have also continued to cut deposit rates. That’s sent investors – from large banks and insurers to mutual funds to rural financial institutions – pouring into the bond market.

The central bank has repeatedly warned against reckless bond buying, worried about a potential bubble that could end up in a Silicon Valley Bank-style crisis.

Among other recent measures to cool the bond market rally, the CSRC asked major mutual fund companies to cap the duration of their new bond funds to two years, sources have said. The central bank has asked some financial institutions to report daily changes in their long-term treasury bond positions, sources have also said.

And this week, big state banks sold large volumes of Chinese government bonds, according to industry trading data and market participants who said the move was aimed at helping push up yields.

Regulators are “firing on all cylinders against bond market misbehaviour,” said one of the sources with knowledge of the CSRC’s latest instructions.

The sources said some of the compliance checks were related to four rural commercial banks under investigation for suspected bond market manipulation.

The National Association of Financial Market Institutional Investors has named the banks as Changshu Rural Commercial Bank, Kunshan Rural Commercial Bank, Jiangsu Suzhou Rural Commercial Bank Co and Jiangnan Rural Commercial Bank. All are based in Jiangsu province in China’s east.

The bond market rally began gathering steam late last year.

This week, China’s 10-year and 30-year government bond futures both hit record levels before paring gains. The 10-years are up 3% this year while 30-year bonds have surged 10%.

On Monday, 30-year treasury yields hit a record low of 2.29%, down 53 basis points since end-2023.

(Reporting by Shanghai and Beijing Newsrooms; Editing by Edwina Gibbs)