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MNI China Press Digest Aug 19: U.S. Debt, OTC Bond Market

MNI summarises the key stories from the Chinese press on Friday.

True

The following lists highlights from Chinese press reports on Friday:

  • The argument that China is accelerating the liquidation of its holdings of U.S. debt is misleading, with sales not matching the speed implied by some press reports, wrote Guan Tao, a former FX official and now global chief economist of BOC International, in a blog post. China’s holdings of U.S. debt have decreased by USD88 billion in the first five months of 2022, with net sales of mid-to-long-term debt only accounting for 24% of the reduction. The remaining 76% of the shrinkage can be attributed to some non-trading factors including negative valuation effect and the failure to roll over holdings after maturity. The remaining maturity of U.S. debt held by China is relatively short, with valuations of such paper greatly impacted by the rapid rise in short-term interest rates, said Guan, adding that the yields of 2-year, 5-year and 10-year U.S. Treasury bonds rose by 180bp, 155bp and 130bp, respectively, in the Jan-May period.
  • The People’s Bank of China has exerted its influence on two occasions since the start of August, in order to accelerate the development of over-the-counter bond trading between commercial banks as it aims to improve the liquidity of the bond market and form a more continuous and effective secondary market pricing mechanism, the Securities Daily reported. Regulators should diversify bond varieties to generate demand from individual investors, as over-the-counter bonds trading is dominated by treasury bonds, financial bonds issued by policy banks and local government bonds with higher credit ratings but lower yields, the newspaper said, citing analysts. Also, regulators can guide the issuance of some special bonds to support green finance and rural revitalization to expand the OTC bond market, the newspaper added.
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The following lists highlights from Chinese press reports on Friday:

  • The argument that China is accelerating the liquidation of its holdings of U.S. debt is misleading, with sales not matching the speed implied by some press reports, wrote Guan Tao, a former FX official and now global chief economist of BOC International, in a blog post. China’s holdings of U.S. debt have decreased by USD88 billion in the first five months of 2022, with net sales of mid-to-long-term debt only accounting for 24% of the reduction. The remaining 76% of the shrinkage can be attributed to some non-trading factors including negative valuation effect and the failure to roll over holdings after maturity. The remaining maturity of U.S. debt held by China is relatively short, with valuations of such paper greatly impacted by the rapid rise in short-term interest rates, said Guan, adding that the yields of 2-year, 5-year and 10-year U.S. Treasury bonds rose by 180bp, 155bp and 130bp, respectively, in the Jan-May period.
  • The People’s Bank of China has exerted its influence on two occasions since the start of August, in order to accelerate the development of over-the-counter bond trading between commercial banks as it aims to improve the liquidity of the bond market and form a more continuous and effective secondary market pricing mechanism, the Securities Daily reported. Regulators should diversify bond varieties to generate demand from individual investors, as over-the-counter bonds trading is dominated by treasury bonds, financial bonds issued by policy banks and local government bonds with higher credit ratings but lower yields, the newspaper said, citing analysts. Also, regulators can guide the issuance of some special bonds to support green finance and rural revitalization to expand the OTC bond market, the newspaper added.