ADVERTISEMENT

China Bond Rally May Stall After PBOC Signals Limits to Easing

China Bonds Rally, Broker Shares Jump on Bets PBOC May Ease Soon

A rally in China’s sovereign bonds that pushed the benchmark yield down by the most since July may leave less room for gains, after the central bank delivered the easing traders had been rushing to price in.

Yields on the 10-year bond dropped five basis points to 2.82% on Monday after Premier Li Keqiang signaled an impending reduction in the reserve-requirement ratio, which the People’s Bank of China announced after markets closed. The PBOC then sought to stave off expectations of more support by saying it hasn’t changed policy direction.

Chinese bonds have been rallying since mid October as concerns over the nation’s growth and contagion from China Evergrande Group’s debt crisis stoked expectations of more policy support. While Standard Chartered Plc. sees yields declining further, others expect it to fluctuate around the current range as policymakers have stressed an intent to maintain its monetary stance. 

“The RRR cut came sooner than the market had expected, which is a reflection of the PBOC’s strong willingness to ease growth concerns,” said Hao Yang, an analyst at Nanjing Securities Co. “China’s 10-year yields should stay within a range of 2.8%-2.9% with limited support from the RRR cut, as the market waits to see whether the easing would be effective in offsetting growth headwinds.”

China Bond Rally May Stall After PBOC Signals Limits to Easing

Read: More China RRR Cuts Needed to Lift Risk Assets: Street Wrap

The central bank will reduce the RRR by 0.5 percentage point for most banks on December 15, releasing 1.2 trillion yuan ($188 billion) of liquidity. The money will be used by banks to repay maturing policy loans and replenish long-term capital, it said. There are almost 1 trillion yuan worth of the one-year loans maturing on Dec. 15.

The cut is a “regular monetary policy action,” the PBOC said. “Prudent monetary policy direction has not changed,” it said. 

The 10-year yield will fall to as low as 2.75% in the coming month, according to Becky Liu, head of China macro strategy at Standard Chartered Plc. The rate will end the year at 2.8%, said Eddie Cheung, senior emerging markets strategist at Credit Agricole.

Financial stocks had rallied ahead of the announcement, with the CSI 300 Financials Index gaining 0.9%. A Bloomberg gauge of mainland-listed China brokerages also rose by the same magnitude. 

Property Bonds

China’s high-yield dollar bonds rose about one cent on the dollar on Monday. Sunac China Holdings Ltd. 5.95% 2024 note rose 4.4 cents on the dollar to 66.2 cents as of 6:37 p.m. in Hong Kong, according to Bloomberg-compiled prices.

The decision comes after recent data showed the economy and industry stabilizing, although Beijing’s tightening curbs on the property market have led to a slump in construction and worsened a liquidity crisis at developer China Evergrande Group and other real-estate firms. 

The PBOC is bucking a global trend of normalizing pandemic-era stimulus, with its markets rocked by a regulatory crackdown on everything from the property sector to technology firms. Yuan-denominated government bonds became one of Asia’s top performers in the past three months on bets Beijing will keep liquidity loose.

©2021 Bloomberg L.P.

With assistance from Bloomberg