MNI China Money Week: Bonds Between Relaxed Policy, Tough Regs

--China Bonds Helped By Relaxed PBOC Policy Stance, But New Regs To Cap Gains

     BEIJING (MNI) - Multiple signs suggesting relaxed liquidity condition and

monetary policy stance have drove bond market rally, but investors need to be

cautious about the regulation effect.

     The PBOC announced Thursday it will hike its reverse repos rate by 5 basis

points, below many analysts' expectations of 10 bps hike, signalling a de facto

more relaxed monetary policy stance by the PBOC. 

     The yields on the ten-year China Government Bond and China Development Bank

bonds fell around 7 and 5 basis points from 3.8154% and 4.8378% on Mar 16 to

3.748% and 4.7803% on Thursday, according to data on Chinabond.

     At present, it appears the PBOC has no intention to raise money market

funding costs and tighten liquidity further, providing a better overall

environment for bond investors.

     --HEADWINDS COMING

     However, despite the bond market's bullish tailwinds, investors need to

consider potential headwinds.

     There are two reasons for the PBOC to continue providing a more relaxed

financial environment for institutions. The first is to help counter any

economic downward pressures, ensuring China reaches its economic growth goal --

around 6.5% -- in 2018. However, to date, China's economy has shown no slowing

signs, so this reason becomes less compelling.

     The second reason is a more relaxed monetary policy stance will provide a

better environment to prevent systemic risks, given that the financial

deleveraging campaign will continue. With new regulations for the asset

management industry expected soon, leading to higher pressures of financial

institutions, this is a possibility. Certainly many banks have expressed

concerns over draft regulations announced last year, fearing the possibility of

systemic risks.

     Pressures on bank liabilities from the financial deleveraging campaign have

been high, witnessed from the rates of negotiable certificates of deposit (NCD).

The average primary market yields on 3-month NCDs issued by joint-stock banks

have been 4.7502% this year, remaining at a high level. 

     Issuance has also remained high, as the total outstanding NCD had increased

to CNY8.88 trillion by Thursday from CNY7.99 trillion at the end of 2017,

suggesting banks still have high NCD demands to match their assets.

     The comparable NCD rates slid this week, falling from 4.7230% Friday to

4.5250% on Thursday. However, this can be hardly be seen as a sign of

alleviating pressures on bank liabilities. 

     --WEALTH MANAGERS

     The scale of short-term wealth management funds has increased recently, as

funds have tried to expand before the new asset management regulation rules kick

in, which will prevent their scale from increasing. Investment flows into NCDs

picked up as a result, driving NCD rates down.

     With regulation policies to be announced soon and bank liabilities pressure

remaining, it is difficult to see bond yields falling much further, especially

considering the possibly of higher overseas bond market yields. 

     However, the path higher yields could be slow, with new regulations on

asset management largely priced in, as the draft was published months ago. But

it is almost impossible to fully price in the effect of the new regulatory

framework given the complicated nature of China's financial system, so the

effect on China bond market will only become apparent over time.

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

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

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