A subsidiary of the People’s Bank of China asked rural lenders to be mindful of risks in government-bond trading and refrain from buying the securities in large sizes, according to people familiar with the matter.

The Jiangsu branch of the monetary authority - located in one of China’s wealthiest provinces and close to financial center Shanghai - this week told rural commercial lenders to control risks associated with their positions in long-term sovereign notes, the people said. The banks were told not to aggressively buy the bonds when state lenders are selling them, they added.

Separately on Monday, the People’s Bank of China also sent market makers a notice requesting them to submit an unusually detailed report on their long-dated bond holdings, another person said.

The people asked not to be identified as the matter was private.

The move is a sign that authorities are pushing ahead with plans to stem a red-hot longer-dated bond rally, after a rush to haven assets pushed yields to fresh record lows. Rural commercial banks, typically smaller in size but more open to taking risks compared to their larger rivals, have been among the most aggressive buyers of government bonds amid the bull run. Most of these lenders run business in under-developed areas.

On Monday, big state banks were seen selling 10- and 30-year notes in large quantities, helping to pull the benchmark yield up to a one-week high after it sank below the closely watched 2.1% level for the first time in history.

China’s large banks sold a net 22 billion yuan ($3.1 billion) of long-dated bonds on Monday, 10 times the daily average last week, according to official data seen by a strategist at BNP Paribas SA.

Information the PBOC requested on Monday from market makers included their transaction volume and outstanding positions, the person added.

The PBOC didn’t immediately reply to faxes seeking comments.

For months, there has been ongoing speculation the PBOC is primed to intervene to prevent a bond bubble that may endanger financial stability in the event of a market reversal. That complicates Beijing’s task of easing monetary policy and keeping funding costs low to rejuvenate the sluggish economy.

In July, the central bank said it had “hundreds of billions” of yuan of government debt at its disposal through agreements with lenders, a sign it was readying to sell them to cool the rally.

Bond holdings at listed city and rural commercial banks, mostly sovereign and quasi-government debt, accounted for about 27% of the group’s total assets at the end of 2023, according to data compiled by PricewaterhouseCoopers LLP. That compared with bond exposure of 25% and 22% at big banks and joint-stock lenders, respectively.

  - Bloomberg