PBoC infuses cash through X-Repo to snap bond markets out of sharp declines

The People's Bank of China (PBoC) had been trying to suppress growing risks in the domestic bond market, which was seen as overheated and displaying characteristics of a bubble by many analysts, citing high leverages in the system.

Traditional year-end cash deficit along with heavy capital outflows and a disruptive bond default that are creating sporadic cash shortages in China, ramping up counterparty risk. Markets remain wary after reports of brokerage Sealand Securities' default on a bond transaction.

The yuan has fallen to levels last seen during the 2008 global financial crisis, 10-year bond yields have soared and Chinese treasury bond futures have been knocked down in an illiquid market.

The nation's stumbling bond market saw a dramatic rebound this week as the central bank reportedly directed banks to make loans through an interbank system called “X-Repo” that was introduced last year but had remained largely untapped.

Market yields fell while bond prices gained during the Tuesday afternoon trading session, snapping the market out of one of the worst declines in recent years that began since October. Futures on Chinese government bonds also rose.

The PBOC has injected a net 1,537.2 billion yuan ($221 billion) into money markets this year through open market operations, many multiples of its net 10 billion yuan injection in 2015.