China Bond Yields Climb as PBOC Skips Rate Cut, Economy Improves

(Bloomberg) -- China’s benchmark bond yield rose the most in five months as the central bank refrained from cutting its policy rate and as data showed the world’s second-largest economy had a strong start to the year.

The 10-year bond yield climbed for the first time in two days after the People’s Bank of China surprised markets by keeping the interest rate on its one-year medium-term lending facility unchanged at 2.85%. The central bank had kept the rate steady last month after cutting it for the first time in almost two years in January.

The PBOC’s decision to leave the rate unchanged is a disappointment for the market, said Xing Zhaopeng, senior China strategist at Australia and New Zealand Banking Group. China will maintain a dovish policy stance going forward but “any operation will be targeted and measured”, he said.

The PBOC’s patience on rates is evident from data that showed China’s economy started the first two months of the year on a strong footing. The growth of industrial output, retail sales and investment were all far above economists’ consensus forecast. 

However downside risks to growth remained. The surveyed jobless rate climbed to its highest level in a year, while rapidly spreading Covid cases and spiking commodities prices in March posed continued challenges to China’s goal of achieving around 5.5% growth this year.

The yield on China’s 10-year bond rose 6 basis points to 2.82%, the most since October 18. The offshore yuan fell for the fourth day. Stocks in mainland China and Hong Kong extended losses as concerns over the country’s ties with Russia and persistent regulatory concerns added to strains. The Shanghai Shenzhen CSI 300 Index fell nearly 5% while the Hang Seng Index declined close to 6%. 

Hopes Linger

Despite the disappointment over unchanged rates, economists haven’t abandoned hopes of a cut going forward.

“We expect a delay but not absence of monetary easing,” said Xiaojia Zhi, economist at Credit Agricole CIB in Hong Kong. She forecasts a 10 basis-point rate cut in MLF and at least one 50 basis point reduction in banks’ reserve requirement ratio by the first half of the year.

Commerzbank AG sees a chance for a rate cut next month. China’s top leaders may hold the first-quarter Politburo meeting earlier next month, said Zhou Hao, senior emerging markets economist at the bank. Authorities may not be able to roll out significant measures before that in the short term, he said.

PBOC’s restraint on policy easing also comes ahead of an expected Federal Reserve rate hike this week. Further easing measures from the PBOC could narrow the interest-rate gap with the U.S. and spur outflows from China. These concerns have already prompted foreigners to reduce their holdings of Chinese government bonds by the most ever last month.

©2022 Bloomberg L.P.

With assistance from Bloomberg