China’s central bank, the People’s Bank of China, says it has temporarily suspended buying government bonds amid concerns about the country’s facing potential economic stagnation.
“The operations will be resumed at an appropriate time depending on the supply and demand conditions in the government bond market,” the central bank said.
According to the New York Times, the central bank’s sudden decision was taken by investors’ recent shift toward purchasing bonds while shunning riskier assets like stocks and real estate.
Consequently, this shift has driven China’s interest rates to a record low.
Despite rising interest rates in most of the world due to inflation fears, it is the opposite when it comes to the Chinese economy as low inflation is a sign of stagnation.
The majority of the Chinese population has lost confidence as housing prices and stock markets continue to fall while households are taking precautions by saving record amounts of money in state-owned commercial banks despite earning measly interest.
Despite the record-high deposits, the banks have struggled with businesses, with many reluctant to borrow.
This has driven up the price of bonds, which drives down the interest that bonds yield.
The central bank’s decision to temporarily halt its own purchases of government bonds will remove that one demand source for bonds, which could slow the rise in bond prices and decline in interest rates.
