To soothe the market frenzy, Chinese authorities temporarily halted trading in some futures contracts for the first time.The PBoC also intervened to ease a liquidity crunch by extending hundreds of billions of yuan in emergency loans to financial firms, and ordering some of the country's biggest banks to lend to non-bank financial institutions.

But the mood in China's $US9 trillion bond market remains tense. Some analysts fear that if the bond sell-off picks up pace, China will see a repeat of the market crash that hit the Chinese share market in mid-2015. At the same time, there are fears that higher bond yields will push borrowing costs higher, adding to the strains faced by debt-laden Chinese corporates.

Rising borrowing costs could cause China's property market to cool more rapidly, which will drag down activity in the economy as a whole. Figures released on Monday show that Beijing's efforts to cool the overheated property market are already beginning to bite, with the rise in prices in China's "first tier" cities – Beijing, Shenzhen, Shanghai and Guangzhou – slowing to 0.1 per cent in November from the previous month. This is well below the monthly price rises of 3 to 4 per cent recorded in these top cities earlier in the year.

Property market clampdown

Over the past few months, Chinese authorities have ramped up their efforts to cool rapidly rising house prices, by increasing the minimum deposit needed for home loans, and making it more difficult to buy second homes. In addition, China's banking regulator instructed lenders to tighten lending standards for property developers and home buyers.

And this clampdown on the property market is expected to continue through 2017. At last week's annual economic policy conference, Beijing said that cooling the property market would be one of its top priorities next year, adding that "houses are for living in, not speculating with".

But this leaves Chinese investors with a major problem. The combination of Beijing's crackdown on speculation, and higher borrowing costs, is likely to push the Chinese property market into reverse next year, with analysts tipping that house prices could fall by up to 20 per cent.

At the same time China's bull market in bonds has clearly come to an end, and there are fears that rising borrowing costs will cause Chinese economic activity to slow.


Worries about China's economic outlook, and the bleak outlook for investment returns that the country offers, are only increasing the resolve of Chinese investors to shift assets out of the country, especially given the likelihood that the Chinese yuan will continue to lose ground against the resurgent US dollar.

The yuan has fallen about 7 per cent against the US dollar so far this year, despite Beijing's efforts to prop up the currency by selling down its foreign currency reserves. According to the PBoC, China's foreign currency reserves fell 5.6 per cent to $US3.05 trillion ($4.21 trillion) on November 30 from $US3.23 trillion at the start of the year.

As capital outflows have intensified, the PBoC has stiffened the rules on moving capital out of the country, even for multinational companies.

Foreign companies now need approval to exchange yuan into US dollars on transactions more than $US5 million, and face tight limits on amounts they can transfer from Chinese bank accounts to bank accounts of affiliates in other countries. But foreign firms are likely react to this crackdown on capital flows by reducing their foreign investment in China, and abandoning any joint venture plans.

The challenge of cooling down an overheated property and bond market markets while side-stepping an economic hard landing would test the abilities of any central banker. To do this at a time when the currency is also under pressure and your country risks being labelled a "currency manipulator" by the United States, will not only require consummate skill, but also a certain degree of good fortune.