MNI China Money Week: Escalating Trade War Support Bond Market

     BEIJING (MNI) - The PBOC's required reserve ratio cut fuelled a big rally

in bond markets this week, and the potential for further easing measures in the

event of a trade war will offer support for bond markets.

     The yield on 10-year China Government Bond and 10-year China Development

Bank Bond fell 15 and 22 basis points respectively on Wednesday, and remain

close to one-year lows.

     While the prospect of increasing bond supply and renewed bullish sentiment

in the market are headwinds to further yield falls, there are still reasons to

be optimistic about the bond market.

     The potential escalation of trade tensions, heightened by the U.S.

sanctions on ZTE, will likely cause the regulators to delay publishing asset

management regulations. It is unlikely that regulators will want to deepen

China's financial deleveraging campaign given an uncertain external environment.

     There is a popular view held among bond investors that the RRR cut signals

the beginning of a round of monetary easing. It is still too early to draw that

conclusion as the liquidity injected from this week's cut equates to less than a

0.5 percentage point RRR cut.

     However, the PBOC announced that the released liquidity will be mainly used

to support loan issuances for micro and small-sized companies, which will help

support economic growth, suggesting the importance of stabilizing growth has

risen relative to dealing with financial risks. This also increases the

potential for more RRR cuts to come if growth pressures increase.

     Moreover, the RRR cut alleviates the structural imbalance of liquidity

problems in the interbank market, where small banks find it difficult to borrow

money when conditions tighten. As the RRR cut injects liquidity for those banks,

liquidity conditions will stabilize and interest rates will likely trend lower.

     With liquidity conditions set to improve and both internal and external

pressures on economic growth remaining high, there are reasons for investors to

be upbeat about the bond market.

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

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

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

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