MNI CHINA MONEY WEEK: Bond Yields Higher As Data Improves

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%.

     --INDEX INCLUSION

     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

stage.

     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.

     --MORE DOWNSIDE POTENTIAL

     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

Thursday. 

     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: les.commons@marketnews.com