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MNI (London)
by Anthony Barton
     LONDON (MNI) - China bonds have been pressured by strong domestic economic
data in the current holiday shortened week, along with heightened optimism
regarding Sino-U.S. trade matters, another leg higher for domestic stocks.
Liquidity matters have likely added extra weight, with the PBOC now having
refrained from injections for 12 consecutive days.
     China's 10-Year benchmark yields have added just around 20bp in W/W terms,
last trading at 3.262%, with futures shedding about 50 ticks in the process.
Ming Ming, Citic Securities head of fixed income research and a former PBOC
official, has suggested that investors will likely refrain from buying bonds
until the 10-year yield rises to 3.4%.
     The general price action may have gone against the grain, given that April
1 marked the inclusion of Chinese yuan denominated bonds in the
Bloomberg-Barclays global bond indices.
     The index inclusion has opened the door to sizeable capital inflows from
across the globe, with ANZ estimating potential inflows of at least US$150bn
over the coming 20 months, a period which will see Chinese paper added to the
benchmarks in steps, as asset managers will have to accrue holdings in order to
track the benchmark indices.
     China's local currency-denominated bonds will become the fourth largest
component of the Bloomberg-Barclays global index in November 2020, accounting
for 6.06% of the benchmark, but only account for around 0.6% at this initial
     The inclusion announcement was made back in early February, with flows
(tracked by the HKEx Bond Connect) picking up since then. March saw the Connect
programme add 94 new overseas institutional investors, with total trade volume
rising by 15.6%.
     Estimates put foreign ownership of Chinese bonds at just over 2%, which
shows the sheer scope for fresh inflows, although the tiered nature of the index
inclusion will likely spread the flows over time.
     The China Securities Journal reported that "overseas investors increased
holdings of China bonds for a fourth consecutive month" in March, with foreign
bond holdings hitting a record CNY1.515tn in the process.
     Back to prices, and the rout may not yet be over. Further pressure could
become apparent if the recent round of targeted fiscal stimulus continues to
show up in economic data, after the shake out of any Lunar New Year distortions.
     Furthermore, the ongoing U.S.-China trade talks provide immediate headline
risk, with President Trump set to meet Chinese trade envoy Liu He later
     Money market and tax pressures could also provide further headwinds for the
space, with some CNY367bn of medium-term loans from the PBOC set to mature on
April 17, while TF securities have suggested that banks will need to set aside
as much as CNY600bn for corporate tax payments this month.
     Despite a slowing in levels of speculation, many analysts still expect
further RRR cuts this year, although many now pricing out a cut in the second
quarter. However, its now seen as less likely that a cut in benchmark rates is
coming anytime soon.
--MNI London Bureau; tel: +44 203-586-2225; email:
MNI London Bureau | +44 203-865-3812 |