(Bloomberg) -- Chinese regulators asked the nation’s biggest insurers to buy bonds being offloaded as retail customers pull their cash from fixed-income investments, according to people familiar with the matter.
At a meeting on Wednesday, Chinese regulators told top insurers to backstop the market and buy bonds sold by wealth management units at banks to prevent further volatility, said the people, who asked not to be named discussing internal deliberations. Some banks also proposed to use their proprietary trading desks to scoop up bonds, one of the people said.
The guidance, handed down at a meeting that was also attended by big lenders, came as Chinese traders and retail investors have been ditching fixed-income assets and pouring money into stocks on growing economic optimism as China rolls back its strict Covid Zero approach. The turmoil last month, which saw large withdrawals from bond-backed wealth management products, earlier also prompted regulators to ask banks to report on their liquidity situation.
Some insurance firms, whose investment products are less vulnerable to short-term redemptions, have already heeded the call and purchased bonds on a positive market outlook even before the latest guidance, the people said. The biggest insurance firms include China Life Insurance Co. and Ping An Insurance Group Co. of China. The asset management arms of just those two manage a combined 8.74 trillion yuan ($1.3 trillion), according to their websites.
The China Banking and Insurance Regulatory Commission didn’t immediately respond to request for a comment.
In an effort to increase transparency of risks and instill more discipline in China’s 29 trillion yuan wealth management market, authorities have embarked on a multi-year reform to have banks ditch a fixed-return model and move to mark-to-market pricing.
That has spooked investors who for years have been used to steady, guaranteed returns, causing large outflows and forced selling by money managers.
China’s benchmark bond yields surged the most in six years on Nov. 14 as signs China is loosening its Covid Zero policies caused a rapid shift into stocks. Yields have continued to climb since, before easing a bit on Wednesday. China’s one-year government bond yield has risen to near the highest this year at 2.25%, after a spike of more than 50 basis points since November.
Chinese bond futures gained on Thursday, posting their biggest gain in two weeks. Futures contracts on the 10-year note rose as much as 0.4% to 99.855, the most since Nov. 23. Yields on 10-year and one-year notes both declined.
Daily redemptions on largely bond-backed wealth management products could have peak at as much as 200 billion yuan, according to an estimate from Everbright Securities.
Banks and asset managers have also moved to limit redemptions. Bank of China Ltd., one of the four big state banks, has set a daily quota on what customers can redeem at 10,000 yuan starting mid-December. Suyin Wealth Management and Bank of Guiyang Co. have also capped real-time redemption on some products at 10,000 yuan per day, according to their latest mandates.
More than 95% of outstanding wealth management products sold by banks and asset managers are marked to market, according to official data as of the end of June. Bonds account for about 68% of the total underlying assets.
--With assistance from Amanda Wang, Wenjin Lv and Zhang Dingmin.
(Adds market reaction in ninth paragraph.)
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