Brokerages cut back on government debt

Agencies and staff reporter

At least four Chinese brokerages have started fresh measures to cut back trading of domestic government bonds beginning last week, people familiar with the matter said.

The brokers reduced trading of sovereign debt, with one of them even suspending transactions in some maturities. While most of the firms called it a voluntary move, one person said the change came following guidance from authorities.

China's 10-year treasury futures dropped 0.6 percent on their worst day in 17 months after the People's Bank of China warned about potential risks arising from the relentless rally in the debt market.

The latest developments follow sweeping efforts from authorities to fight back against the bond rally. Yields had been hitting new lows for months amid economic gloom and bets on interest-rate cuts, but have started to climb in recent days - a sign investors are finally taking heed of the warnings.

But die-hard investors say the bull market in government bonds still has legs, citing China's wobbly economy, deflationary pressures and low investor appetite for riskier assets.

Meanwhile, China's local governments have been called to stop offering excessive tax incentives to compete for investments with other cities, given the potential budget pressure on local governments and risk of market disruption, according to an editorial by state media Economic Daily.