China intensifies controls in the bond market to avoid financial risks.

Chinese authorities have intensified their offensive to control the growing frenzy in the country's bond market, an action that reflects the government's concern over the risk posed by banks' exposure to fluctuating interest rates. Last Friday, in an unusual move, rural banks in Jiangxi were ordered not to settle recent public debt transactions, a decision that goes against usual market practices and has left many investors baffled. The regulators' intervention aims to cool down a spike in bond yields that had reached historic lows, specifically a 10-year benchmark rate that hit 2.12% in early October. However, following the recent intervention, this rate has begun to rise, hovering around 2.22%. This movement is a clear indication of the government's intent to restore balance in the market and prevent a bubble that could affect the country's financial stability. Despite the apparent initial success of the measures, analysts warn about the risks associated with government intervention. "The authorities' intrusion could disconnect the market from its economic fundamentals and undermine long-term investor confidence," stated Becky Liu, head of macro strategy at Standard Chartered Plc. Her comments highlight the dilemma facing Beijing: supporting the economy through low borrowing costs while ensuring that money does not become so cheap that it fosters asset bubbles. The current context also recalls the collapse of Silicon Valley Bank, which purchased U.S. Treasury bonds before rates rose, prompting Chinese authorities to be more cautious. They have begun taking steps to limit risks in financial institutions, and in this regard, several brokerage firms have reduced trading in state bonds, following guidelines from the authorities. Concerns about financial risks have been reflected in the market's reaction. Trading volumes for 10-year bonds plummeted dramatically, reaching only 58 billion yuan, which represents just 48% of the previous week's average. This decline in activity is a direct reflection of the uncertainty surrounding the market and the lack of confidence in the government's measures. On the other hand, recent data has shown that foreign investors are pulling record amounts of money out of China, highlighting a widespread pessimism towards the country's assets. This capital flight underscores the negative perception many have regarding China's economic and financial stability in the current context. Amid all this, the People's Bank of China has been making efforts to warn the market about interest rate risks since April, trying to establish a level of "comfort" for long-term bonds and deter speculative positions. However, economists are questioning whether these measures will be sufficient to raise long-term yields, as ultimately, it is economic fundamentals that determine market behavior. Chinese public debt has been on the rise, driven by grim economic outlooks and expectations of interest rate cuts. The lack of attractive alternatives, such as the real estate sector and stocks, has led many investors to opt for public debt, which has fueled demand. However, the increase in public borrowing, aimed at stimulating the economy, has not dissuaded buyers who still see bonds as a viable option. In conclusion, the current situation of the bond market in China is a reflection of the complexity of the economic moment the country is facing. Authorities seek to balance the need to stimulate economic growth with the need to maintain financial stability, in a context where government intervention can have both positive and negative consequences. As the situation evolves, it will be crucial to observe how both the intervention measures and the market's reaction to them develop.