MNI CHINA MONEY WEEK: Rising NCD Rates See Yield Curve Flatten

     BEIJING (MNI) - China's yield curve flattened in the current week, largely

as higher yields on negotiable certificates of deposits pressures short-term

bond yields higher.

     The spread between 1-year and 10-year China Government Bond yields narrowed

more than 11 basis points from 75.77 basis points to 64.19 basis points as of

Thursday, largely on the back of a rapidly rising 1-year CGB yield, up from

2.9305% last Friday to 3.0701%.

     The rise in 1-year CGB yields was surprising, given liquidity conditions

were relaxed through the week. Although suffering from tax payment pressures,

the average seven-day deposit repo and repo were 2.7891% and 3.1412%

respectively, lower than 2.9421% and 3.8109% seen in mid-April when tax payment

factors first kicked in.

     --HIGHER NCD RATES

     Higher negotiable certificates of deposit (NCD) rates could offer an

explanation. Three-month and six-month NCDs issued by joint-stock banks saw

their average primary market rates increasing from 4.2125% and 4.2500% last

Friday to a current 4.4012% and 4.5167%, respectively. Moreover, NCD net

issuance amounted to CNY396 billion this week, the highest since mid-June 2017.

     Higher NCD yields are making short-term CGBs less attractive to investors,

leading to a drop-off in demand, pushing yields higher.

     Increased net issuance and higher NCD yields are a reflection of increased

pressures within the banking sector following the introduction of new asset

management industry regulations. It is seen as likely that NCD rates will

continue to trend higher given the long-lasting impact of the new regulations,

which, in turn, will likely prevent short-term bond yields from falling

significantly.

     --FURTHER RRR CUTS

     However, not all is bad news from the front-end of the curve. As China's

government has vowed to keep corporate funding costs low in the wake of

increased economic headwinds this year, it is unlikely Beijing will sit and

watch bond yields rising too far, slowing corporate bond issuance, putting

further pressure on growth and default risk. This may lead to further required

reserve ratio cuts later this year to alleviate banks' capital pressures, which

will in turn help lower NCD rates and stabilize the bond market.

     --INCREASED LIQUIDITY

     A further positive sign for the bond market is the PBOC appearing to show

greater care for liquidity. So far this week, the PBOC has injected a net of

CNY410 billion, keeping interbank rates relatively low. 

     In its latest monetary policy report, the PBOC also deleted that it will

"offer liquidity when liquidity is insufficient while cutting liquidity when

liquidity is abundant", hinting a greater tolerance for liquidity to remain

relatively relaxed.

     This perhaps highlights that tighter liquidity through the end of April

should be treated as a warning from the PBOC rather than the new normal. A

friendlier liquidity environment from the central bank should offer solid

support to the bond market.

--AUCTION RESULTS

     Unsurprisingly, this week's auction results showed a greater appetite for

the longer-end of the curve. 

                                   Issuance                            Secondary

               Issuance  Duration     Scale  Issuance  Bid/Issuance       Market

Bond Issuer        Date   (Years)     (Bln)     Yield         Ratio        Yield

--------------------------------------------------------------------------------

Agricultural

Development

Bank of China    May 14         2         4   4.0515%          3.19      4.1280%

China

Development

Bank             May 15       0.5         6   2.9569%          2.19      3.1962%

China

Development

Bank             May 15         1         4   3.6532%           3.4      3.8080%

China

Development

Bank             May 15         3         5   4.2168%          2.99      4.2423%

China

Development

Bank             May 15        10        12   4.5075%          2.45      4.5266%

Agricultural

Development

Bank of China    May 16         1         8   3.8900%           1.6      3.8756%

Agricultural

Development

Bank of China    May 16         5         8   4.4584%           2.5      4.5248%

Agricultural

Development

Bank of China    May 16         7      4.57   4.5913%          3.44      4.6430%

Agricultural

Development

Bank of China    May 16        10         5   4.6765%          2.84      4.6779%

Ministry of

Finance          May 16         1        41   3.0200%          1.77      2.9669%

Ministry of

Finance          May 16        10        41   3.6900%           2.2      3.7151%

China

Development

Bank             May 17         5         5   4.3407%          3.51      4.4126%

China

Development

Bank             May 17         7         4   4.5782%          3.78      4.6384%

Export-Import

Bank of China    May 17      0.25         3   2.7968%          3.89      3.0088%

Export-Import

Bank of China    May 17         3         7   4.3229%          2.36      4.3777%

Export-Import

Bank of China    May 17         5      5.53   4.4575%          2.81      4.5338%

Ministry of

Finance          May 18      0.25        10   2.8275%          2.09      2.7497%

Ministry of

Finance          May 18        50        29   4.1300%          2.24      4.1987%

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

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

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