BEIJING: The People’s Bank of China (PBoC) has tapped two of the country’s biggest banks for its plan to borrow government bonds, a potential step toward cooling a market rally, according to sources.

The PBoC signed an agreement with Industrial & Commercial Bank of China Ltd and is in talks with Postal Savings Bank of China Co to borrow bonds, the sources said.

It’s unclear if the PBoC has lined up other banks, when and how many bonds it plans to borrow and at what rate. It also couldn’t be determined if the central bank will provide any pledged security.

The PBoC said in a brief statement on Monday that it had decided to borrow bonds to maintain the steady operations of the market.

The announcement - which came as China’s benchmark sovereign yields tumbled to a record low - led to speculation that the PBoC may be accumulating the notes to sell later to cool the rally.

The PBoC has been pushing back against China’s bond rally for months to move yields higher, while investors have debated how this strategy would work in practice.

Buying and selling bonds may also be part of its liquidity management toolbox.

The measures could act as a floor under the nation’s bond yields, which have slid to record lows in longer-dated maturities on pessimism over the economic outlook and bets on interest rate cuts.

Ample liquidity in the financial system amid weak loan demand has also driven yields lower, while an increase in government borrowing to boost fiscal stimulus has not deterred bond buyers.

The PBoC didn’t immediately respond to a request for comment.

The central bank hinted at bond selling in May, when an affiliated newspaper reported that the PBoC could step if demand continues to rise.

Leveraged bond-buying not only amplifies volatility but raises the risk of large losses in the event of a market reversal, it warned.

At a forum in Shanghai last month, PBoC governor Pan Gongsheng said the central bank was studying with the Finance Ministry the implementation of sovereign bond trading.

A practical issue for authorities is that there may not be enough bonds for them to sell, or at least those with the maturities it wants to guide.

The central bank held about 1.5 trillion yuan (US$207bil) of government debt on its balance sheet as of May, mostly special sovereign bonds with shorter maturities.

Meanwhile, ICBC held 8.72 trillion yuan of central or local government bonds, while Postal Savings owned 1.66 trillion yuan in such bonds at the end of 2023, according to to their financial reports.

 - Bloomberg