China Bond Traders Are Underestimating Inflation Risk, CCB Warns

(Bloomberg) -- A slump in Chinese government debt may worsen, with inflation picking up as breweries, dairies and others raise prices, and energy costs climb amid a government crackdown on coal.

Cui Li, Hong Kong-based head of macro research at CCB International Holdings Ltd., expects inflation to rise to 2.5 percent this year, a marked increase from 2017 when China’s consumer price index averaged 1.6 percent.

“Food prices will rise, raw material costs are passing through, and pollution curbs have intensified -- I don’t think the market has yet fully priced in the impact of inflation,” said Cui. She expects China’s 10-year government bond yield to range between 4.3 and 4.5 percent by the end of the year versus 3.97 percent Thursday.

China’s sovereign bonds have fallen for five quarters, the longest losing streak since Bloomberg started compiling the data in 2005, as the government stepped up a campaign to cut leverage in the financial sector.

To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Will Davies

©2018 Bloomberg L.P.

With assistance from Xiaoqing Pi