rural banks halted, yields rise, investor confidence threatened.

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Chinese authorities have taken extraordinary measures to tighten their grip on the world’s third-largest government bond market. In a highly unusual move, regulators instructed rural banks in China’s Jiangxi province not to settle recent purchases of government bonds, effectively reneging on their market obligations. This intervention is part of a series of actions aimed at cooling a market rally that had pushed yields to record lows and raised concerns about banks’ exposure to interest-rate risk. While these interventions have temporarily increased yields, there is a risk that such meddling could detach the market from its economic fundamentals and undermine long-term investor confidence. Authorities are navigating a delicate balance between supporting the sluggish economy with low borrowing costs and preventing the formation of a bond bubble that could jeopardize financial stability.

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