(Yicai) July 1 -- The People’s Bank of China said it will borrow Chinese government bonds from primary dealers to maintain market stability, following concerns over the recent dip in bond yields.

“In order to maintain the sound operation of the bond market, the People's Bank of China decided to borrow China government bonds from primary dealers of open market operations in the coming period, based on prudent observation and assessment of the current market situation,” an announcement said on the PBOC’s website today.

The move means the central bank may also conduct government debt sales i the open market soon, China Securities Journal reported today, citing Ming Ming, chief economist at Citic Securities.

Sales of government bonds can help to steady long-term bond yields and avert interest rate risks, Ming noted, saying that the 10-year government bond yield has fallen to a record low.

The most-active contract for 30-year government bond futures fell 1.2 percent today and the most active for 10-year bond futures fell 0.4 percent, data from financial provider Wind Information showed. The Shanghai Composite Index and Shenzhen Component Index closed up 0.92 percent and 0.57 percent, respectively.

Borrowing or sales of government bonds by the PBOC can be used to adjust market liquidity or implement specific monetary policies. It allows the bank to boost liquidity in an economic downturn or reduce it to tame inflation in an overheated economy. It can also influence long-term interest rates, thereby impacting investment and consumption decisions.

Including government bond purchases and sales in the monetary policy toolbox does not mean that the PBOC will resort to quantitative easing, Governor Pan Gongsheng said on June 19.

Bond purchases and sales are a basic money supply channel and a tool for managing liquidity, he noted. The bonds will be bought and sold, and this will be combined with other instruments to jointly build a suitable liquidity environment, he added.

Editor: Tom Litting