Easy Money Won't Keep China Bond Bulls Happy for Long 

(Bloomberg) -- Investors thinking the current rally in China’s sovereign bonds means it’s about to catch up with the big global surge might want to reconsider.

That’s the takeaway from a survey of 34 analysts and traders by Bloomberg this week. The median 10-year yield forecast was 3.18% for the end of September, up slightly from 3.17% on Thursday. And a key gauge of interbank borrowing costs -- which hit a four-year low -- will average 2.5%, the survey also showed. That’s about 50 basis points higher than the current level.

China’s government bonds have jumped in recent days, with the yield falling 10 basis points in four sessions, after another set of weak economic data strengthened the case for further monetary easing. Still, survey respondents said the People’s Bank of China will stand pat this quarter, taking account of the shorter-term liquidity it has already pumped in.

“Investors shouldn’t be too hopeful of broad monetary easing,” said Zhong Zhengsheng, managing director at research firm Cebm Group Ltd. One concern among officials: liquidity in the system could go toward property, exacerbating home-price inflation, he said.

And with money-market rates so low, it’s an open question whether a cut to the cost on funds the PBOC offers to banks is needed, Zhong said.

• Twenty of the survey respondents said the central bank will keep the required reserve ratio unchanged in this quarter
• Only one predicted a cut in the benchmark lending rate
• And 20 said authorities will refrain from reducing the rate for open-market operations

China’s government bonds have been lagging behind the powerful global rally -- ironically underlining the potential value of the world’s second-largest debt market as a diversification option for international investors. Indeed, foreign inflows to China’s bonds have continued.

For local funds, a flurry of municipal bond issuance has weighed on the market -- alongside the reverberations of a seizure of a local bank, which sparked concern about the potential for forced sales of government bonds by smaller lenders in a rush to raise cash.

Bulls on China sovereign bonds might need to count on a further deterioration in economic data that forces officials to act on the monetary front.

“With further policy easing and less concern on credit risks, China’s government bonds may rise in a six-month horizon,” said Larry Hu, chief China economist at Macquarie Group Ltd. in Hong Kong.

--With assistance from Jing Zhao, Xize Kang, Yuling Yang, Ling Zeng, Helen Sun, Shuqin Ding, Tongjian Dong and Claire Che.

To contact the reporters on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Wenjin Lv in Shanghai at wlv8@bloomberg.net;Cynthia Li in Hong Kong at cli205@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Philip Glamann, Christopher Anstey

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