Dec 16, 2016 05:35 PM

China Bond Markets Roiled by Rumors, Fed Rate Increase

(Beijing) — Several mutual funds in China suffered huge selloffs amid a bond market crash Thursday, and the funds scrambled for money as most banks tightened lending to non-bank financial institutions.

At 4:45 p.m. on Thursday, 15 minutes before the central bank's interbank high-volume payment clearing system closed, several fund management firms were still looking high and low for cash to pay panicked investors who were selling their money market funds.

During morning trading that day, the price of government-bond futures dropped to their daily limit across the board, halting trading. Trading resumed only after the central bank, the People's Bank of China (PBOC), pumped 145 billion yuan ($21 billion) through open-market operations into the short-term money market.

On Friday, the prices of 10-year government bond futures rebounded by over 1% during trading after the PBOC offered 207 billion yuan in six-month medium-term lending facility (MLF) loans, and 187 billion yuan in one-year MLF loans to 19 financial institutions in the morning.

China's bond market had been under severe pressure as securities and banking regulatory authorities tightened rules over shadow banking activities, which is a major source of borrowed funding for the bond market. A U.S. Fed rate increase Wednesday, New York time, and subsequent hawkish comments also hit the bond market because they may further increase capital outflows from China.

But the immediate cause of Thursday's crash was a rumor that one securities firm defaulted on 500 million yuan in bond payments — a rumor the company denied.

Caixin learned from several bankers that many commercial lenders, including the four largest state-owned banks, suspended granting loans on Thursday to non-bank financial institutions like securities and fund-management firms.

In addition to the rumor of the bond default by a brokerage, banks may also have been spooked by a rumor that one mutual fund faced major fund redemptions, which further spread panic and aggravated fragile investor confidence.

All this came at a time when banks are extra cautious. They need to make sure their capital reserves are adequate on the 15th of each month. Additional reserves are required if their regulatory scores are lowered in a quarterly assessment system that gauges a bank's capital adequacy, which includes interbank lending and borrowing, bank sources said.

Caixin confirmed with PBOC sources that the central bank urged commercial lenders to grant long-term loans to non-bank financial institutions. Some bankers said this was a bid to help avert the wild fluctuations in the bond market and convey a message that the central bank will take measures to guarantee the bank's liquidity.

Contact reporter Dong Tongjian (

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