China's Defence of Currency Takes Toll on Big Banks, Bond Funds

China's strategy of defending its currency by choking local liquidity is sending ripples throughout the financial system, squeezing banks and fuelling losses at bond funds.

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BEIJING —

The People's Bank of China (PBOC) has drained cash through open market operations most days in February, supporting the renminbi by making it more scarce.

But that has had unintended consequences. Banks have hoarded cash rather than lend it to rivals, while debt funds have suffered losses as investors sell bonds to raise money.

China's 10-year bond yield hit its highest level since December on Feb 24.

The latest sign of a cash crunch at Chinese banks is a sharp drop in their lending through repurchase contracts, or repo.

The country's biggest banks cut their lending in the repo market by around two-thirds in mid-February, compared with the daily average in 2024, according to people familiar with the matter.

“If banks' cash-borrowing pressure keeps building and the costs climb further, it may limit their ability to issue loans and support the economy,” analyst Yang Yewei, from local brokerage Guosheng Securities, wrote in a note. “We doubt tightness in funding can be sustained for a long period.”