China intensifies interventions in the bond market amid rising economic unease.

Chinese authorities have intensified their intervention in the bond market in response to growing discomfort over the behavior of this critical sector of the economy. In an unusual measure, regulators have instructed rural banks in Jiangxi not to comply with the settlement of recent public debt transactions, representing a direct violation of their obligations in the market. This decision is part of a set of actions aimed at cooling an unexpected rise in yields, which had driven rates to historic lows. This move comes amid increasing official concern about banks' exposure to interest rate risk, a subject of warnings from the People's Bank of China (PBOC) since April. Despite these warnings, bond yields continued to decline, prompting authorities to send a strong message to the market regarding their stance on long-term bonds. Recent efforts to control the market appear to have had an immediate effect. After hitting a historic low of approximately 2.12% earlier this month, the 10-year benchmark rate has begun to rise, currently sitting close to 2.22%. However, this type of intervention poses significant risks: it could disconnect the market from its economic fundamentals and erode long-term investor confidence. Recent experiences of Chinese authorities are overshadowed by the memory of past failures in attempting to control other markets, such as equities and currencies. These attempts have often resulted in chaotic consequences and have led to widespread distrust among international fund managers. Recent data shows a record outflow of foreign capital from the country in the second quarter, highlighting persistent pessimism towards Chinese assets. Becky Liu, head of macro strategy at Standard Chartered Plc, has noted that the PBOC is trying to convey a clear message to the market regarding its level of "comfort" with bond yields. However, there is a clear dilemma for Beijing: it must find a balance between supporting the economy through low rates and preventing the formation of bubbles in the bond market that could threaten financial stability. Chinese authorities seem to be taking lessons from the collapse of Silicon Valley Bank, which acquired U.S. Treasury bonds before interest rate hikes occurred. In this sense, the measures adopted by the government aim to limit risk in financial institutions, but the long-term effectiveness of these actions remains in doubt. Among the various interventions, some brokerage firms have begun to restrict trading in government bonds, following regulators' guidelines. Additionally, major state banks in China have been instructed to record the details of sovereign bond buyers, which is interpreted as an attempt to curb speculation in the market. On another note, in Shanghai, the People's Bank of China branch has summoned certain financial institutions to discuss the risks associated with the bond market. This meeting reflects the growing concern of regulators about the potential effects of a low interest rate environment on the stability of the financial system. Trading volumes for 10-year bonds have fallen significantly, reaching only 58 billion yuan (approximately 8.1 billion dollars) on a recent day, representing just 48% of the average from the previous week. These figures indicate a market reaction to regulatory interventions and the climate of uncertainty surrounding them. Despite the recent rise in bond yields, analysts such as Citigroup economist Xiangrong Yu have expressed doubts about whether the measures taken by the PBOC will be sufficient to sustain a long-term increase in yields. He asserts that, ultimately, bond yields will be determined by economic fundamentals, not just by regulatory interventions. Chinese public debt has gained attractiveness amid bleak economic outlooks and growing demand for financial investments, raising questions about the effectiveness of the government's current control strategies.