(Bloomberg) -- As the Chinese bond market undergoes a powerful rally, the nation’s so-called policy banks are turning away from the People’s Bank of China as a source of funding and rushing to raise debt instead.

China Development Bank and its two fellow policy-oriented lenders repaid a net 343 billion yuan ($48 billion) of funds under the People’s Bank of China’s Pledged Supplemental Lending program in April. That’s the largest repayment since data began in 2015, the latest official figures showed.

By contrast, bond sales by the trio of lenders hit 364.7 billion yuan last month, the highest level for the period in nearly two decades, according to GF Securities Co.

For policymakers, the shift in funding has mixed consequences. PSL lending is mainly dedicated toward infrastructure and real estate projects, so CDB and its counterparts may have more freedom in deploying the cash raised from bonds. But, by stepping up supply in the bond market, the policy banks could aid efforts by regulators to stem a rally that’s spurred concerns.

Yields on a number of instruments have tumbled to record lows, undermining demand for China’s currency as rates stay relatively high in the US and other markets. Officials have ramped up scrutiny of trading behavior, and warned some banks to limit their exposure to bonds amid financial-stability worries.

The policy banks are key state-owned lenders that extend credit mainly based on government priorities rather than the pursuit of profit.

Yields on five-year bonds issued by China Development Bank have declined to 2.15%, below the 2.25% interest rate on PSL loans — illustrating the relative appeal for funding in the market.

“The cost of financing from bond issuance is cheaper than the cost of PSL, so the policy banks are less willing” to roll over the PSL loans, Zhong Linnan at GF Securities wrote in a report Tuesday.

Surging supply could in time have the impact of denting the rally in the bond market, and the PBOC may even intend to push policy banks to keep issuing more securities in order to achieve that, according to Zhong.

Housing Support

One of the policy banks, the Agricultural Development Bank of China, is among the biggest issuers in the domestic bond market, and said in March that it was considering accelerating debt issuance in the second quarter. The third member of the trio is Export-Import Bank of China.

PBOC PSL funds are closely watched by market participants, as the PBOC has used it to provide 500 billion yuan in funding support to so-called “major projects,” including the construction of government-subsidized housing as well as the renovation of urban villages.

To be sure, the contraction in PSL credit to the policy banks doesn’t necessarily mean a withdrawal of support for those projects. Beijing can still tap other resources. The Ministry of Finance announced late Monday it will provide billions of yuan of direct funding to help more than a dozen qualified cities renovate run-down public buildings and upgrade infrastructure.

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