China's cenbank signals it may soon start bond market trading as rally persists

SHANGHAI/BEIJING (Reuters) -China's central bank on Wednesday signalled that it might soon start trading in the secondary bond market as yields continue to fall, reinforcing policymakers' concerns that sharp speculative-driven moves could unwind rapidly in a blow to financial stability.

The People's Bank of China, which has pledged to add treasury bond trading to its monetary policy toolkit, has issued repeated warnings against plummeting yields in long-dated government bonds, but has failed to reverse the trend.

"At present, it is particularly important to pay attention to the maturity mismatch and interest rate risk of the large holdings of medium- and long-term bonds by some non-bank financial institutions," PBOC Governor Pan Gongsheng told the Lujiazui Forum in Shanghai.

Pan's latest comments come as pressure is growing on the central bank to back statements with action.

In an apparent signal that the PBOC won't stay sidelined for much longer, the governor said that China must address the kind of risks that led to the collapse of the Silicon Valey Bank in the United States last year once the market turned.

"The risk event of the Silicon Valley Bank in the United States has told us that central banks need to observe and assess the situation of financial markets from a macro-prudential perspective, so as to correct and block the accumulation of financial market risks in a timely manner," Pan said.

He added the central bank will work on "maintaining a normal upward-sloping yield curve and to keep the market's positive incentives for investments."

China's 30-year government bond yield edged up 1 basis point after Pan's comments, but continued trading below the closely-watched 2.5%.

Separately, the governor also told the forum that China will flexibly use various monetary policy tools including interest rates and reserve requirement ratios.

Both Pan and Zhu Hexin, head of the State Administration of Foreign Exchange (SAFE), reiterated at the forum that China will resolutely prevent the yuan exchange rate from overshooting.

China's yuan has lost about 2.2% against a resurgent U.S. dollar so far this year, pressured by its relative low yields versus other currencies. [CNY/]

(Reporting by Shanghai and Beijing Newsroom; Editing by Christian Schmollinger and Shri Navaratnam)