Chinese sovereign bond trading suspended after frantic retail buying

Trading in China’s much-anticipated Rmb40bn ($5.5bn) issue of special 30-year sovereign bonds was suspended twice on its market debut on Wednesday, as exchanges warned of “abnormal fluctuations” and urged investors to be rational and pay attention to the risks.

Beijing plans to sell a total of Rmb1tn 20 to 50-year sovereign bonds this year to fund government spending in critical areas as a way of trying to spur growth. The first batch of the bonds debuted on the Shanghai and Shenzhen stock exchanges, rather than just over the counter at banks, giving Chinese retail investors greater access than usual.

Prices for the new bonds, which offered a 2.57 per cent yield at launch, surged 13 per cent at the open before trading was suspended. They later jumped to a 25 per cent gain on the day before a second suspension by the Shanghai Stock Exchange.

In the final minutes of trading, prices fell back and the bonds closed 1.3 per cent higher on the day. Similar price spikes also triggered suspensions by the Shenzhen exchange on Wednesday. Bond trading in the coastal city closed up 20 per cent on the day.

“The exchange reminds investors to pay attention to transaction risks and invest rationally,” the two exchanges said in statements.

The bonds are attracting huge interest from investors hunting for haven assets in the face of a slow-burn crisis in the property sector that has spilled over into the stock market. Falling deposit rates offered by banks have also left both institutional and retail investors lacking investable assets with attractive returns.

“Going after haven assets is the golden investment strategy right now,” said a Shanghai-based equity department manager at a state-owned securities company. “Retail investors could hardly access sovereign bonds previously, but now the special sale offers a chance.”

The rapid buying by retail traders on Wednesday came after huge investor demand for sovereign bonds in the first quarter of 2024. Net purchases of outstanding sovereign bonds by Chinese banks, overwhelmingly by regional lenders, totalled Rmb270bn in the first three months of this year, according to securities market data analysed by BNP Paribas.

The People’s Bank of China, the country’s central bank, has repeatedly signalled its discomfort over the scale of the banks’ purchases of long-dated sovereign bonds, which are vulnerable to interest rate movements. It also hinted heavily that it would buy sovereign bonds in the secondary market for the first time in decades, as it tried to better control yields. 

The Ministry of Finance will launch the sale of a second batch of Rmb40bn 20-year sovereign bonds this Friday, with trading starting next Wednesday. The rest of the sale will take place in November, according to statements by the ministry.