CHINA MONEY WEEK: Yuan Bonds Rally Despite Fiscal Largesse

By Anthony Barton

     LONDON (MNI) - Risk-off flows at the end of the week allowed the lead

Chinese 10-Year bond future to close a little higher on a weekly basis, shaking

off the effects of fiscal loosening in the early part of the week.

     A stabilising yuan versus the dollar and the levelling out of domestic

equity benchmarks, for the time being, outweighed looser government purse

strings, ultimately lending some support to yuan bond futures.

     The annual National People's Congress (NPC) saw Premier Li Keqiang reveal

China's 2019 official economic growth target of between 6.0% and 6.5%,

representing a downgrade from last year's target of 6.5%.

     On the money supply front, Li noted that M2 and aggregate financing will

match nominal GDP growth.

     --fiscal easing

     The budget deficit is set to hit 2.8% of GDP in 2019, compared with 2.6% in

2018, while fiscal policy will be "proactive, stronger and more effective." The

major fiscal measure of note was a CNY2tn tax cut, with a VAT cut for the

manufacturing industry accounting for ~CNY800bn of the cuts.

     China's finance minister, Liu Kun, later stressed that tax cuts are the

country's top fiscal priority in 2019, and aims to counter the country's

economic slowdown. Liu was keen to note that "proactive fiscal policy doesn't

mean Beijing will open a floodgate of stimulus."

     Ming Ming, chief analyst at CITIC Securities noted that for the first time

in recent years, the annual report indicated that "the authority may use

quantitative and price instruments, such as reserve requirement ratio and

interest rates, to guide financial institutions expanding credit and lowering

lending cost." This thought process has likely aided demand for Chinese paper

this week. 

     That being said, focus is likely to remain on non-benchmark rates. Late in

the week, PBOC advisor Sheng Songcheng stated that "China's benchmark interest

rates are very low."

     --WEAKER STOCKS

     A final leg of support likely came from the pullback in the shanghai

Composite. Which failed to close above 3,000 on a weekly basis, after a foray

above the level for the majority of this week. In terms of mechanics, a soft

round of February trade data, on a headline and breakdown basis, as well as a

negative brokerage call from Citic Securities on PICC and the broader risk-off

theme weighed on domestic stocks at the end of the week.

     In local debt news, Liu Shangxi, head of a research institute under the

Ministry of Finance, revealed that China will only conduct bond swaps for

remaining legacy local government debt and not for treating new issues. A risk

positive, as the measure shouldn't be used to plug fresh local gov't problems.

Reports suggested legacy local government debt issued under LGFV totalled CNY315

billion at the end of January.

--MNI London Bureau; +44 203 865 380; email: anthony.barton@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,M$$FI$]