China starts bank stress tests amid risk of bond-exit stampede

Central bank wary of risks that bull run might lead to one-sided bets in long-term govt bonds

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BEIJING China has initiated stress tests with financial institutions on their bond investments, to make sure they can handle any market volatility should a record-breaking rally reverse, according to staterun media.

The People's Bank of China (PBOC) has recently started the tests gradually, wary of risks that a bull run might lead to one-sided bets in long-term government bonds, according to a front-page report by Financial News. Its intention may not necessarily be to significantly push yields higher, the central bank-backed newspaper said, citing an unidentified source.

Financial institutions should be able to cope with large drops in bond prices, as crowded holdings in debt positions could easily turn into a "stampede" in the event of a sharp yield reversal, Financial News said. That can raise the likelihood of a liquidity crisis and threaten financial stability, it added.