China's policy-oriented lenders repaid a record amount of loans to the central bank as they turned to bond issuances for funding, a move economists say is part of Beijing's efforts to boost long-term yields amid a strong bond rally.

A trio of policy banks that include China Development Bank paid back 343.2 billion yuan, or about $47.5 billion, of loans under the central bank's pledged supplementary lending program in April. That was the largest monthly repayment since the facility's launch in 2014. The People's Bank of China uses the facility to inject liquidity into banks with the aim of channeling funds to key sectors of the economy.

Though the pivot away from loans drains some long-term liquidity from China's banking system, economists say they don't view this as signaling monetary tightening. Instead, the move, coupled with concurrent policy bank bond issuance, likely reflects Beijing's concerns around low credit yields that have dented demand for the yuan.

The PBOC has publicly refuted the notion that it should trade government bonds as a way to move yields, which it views as a form of quantitative easing, economists at Pantheon Macroeconomics said in a note on Wednesday.

"Rather, the bank [PBOC] is probably resorting to leaning on the policy banks to lift yields," expecting them to issue bonds, they said. Higher yields should help ease currency pressure, the economists added.

The yuan, like other Asian currencies, has come under strain recently from a strong U.S. dollar and other headwinds. Low yields complicate efforts to support the Chinese currency. China's long-term government bond yields have recently hit record lows, as investors flock to haven assets and government bond supply remains tight. This has prompted PBOC to caution against locking too many funds into long-term bonds at excessively low yields, as future returns might fail to cover financial institutions' funding costs.

According to Guangzhou-based brokerage GF Securities, bond sales by the three policy banks--CDB, Agricultural Development Bank of China and Export-Import Bank of China--hit CNY364.7 billion in April, the largest sum for that month in nearly two decades.

With the yields of policy bank bonds now lower than the interest rates of PSL loans, the three lenders are also likely less willing to roll over their policy loans, GF Securities economist Zhong Linnan said in a report Tuesday.

Some economists have also warned against over-interpreting the PSL contraction as signs of a shift in policy makers' stance toward the property sector.

China's central bank reintroduced the facility late last year to support policy initiatives to aid the ailing real-estate sector, like increasing the supply of affordable housing. Via the lending tool, which is viewed as a barometer of policymakers' willingness to rescue the property sector, the PBOC has injected CNY500 billion of liquidity into the three policy banks over the period from December last year to this January.

"April's PSL contraction was likely driven by maturing loans used for the shantytown renovation program several years ago and should not affect funding for the ongoing housing easing," said Goldman Sachs economists in a note Tuesday. The average tenor of PSL loans is usually 3-5 years, meaning that the loans that matured in March-April could have been issued in 2019-2021, they said.

After April's Politburo meeting, an increasing number of China's megacities like Beijing and Shenzhen have removed some home-purchasing restrictions.

"This suggests policymakers have been more aware of the property sector risk, opened the door for further demand-side housing easing, and shifted the focus of property rescue strategy to digesting existing housing inventory," said GS economists.

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(END) Dow Jones Newswires

05-08-24 0512ET