Stan Chartered Look For tight Trading Range In 10-Year CGBs In ‘22

Standard Chartered expect “a range-bound year for China rates in 2022, with 10-Year CGB yields largely in a 2.70-2.95% range. Rates may fall in Q1 on likely monetary policy easing, sub-par growth, and relatively light primary supply. But yields may rebound in subsequent quarters as credit growth accelerates, primary supply rises, and growth stabilises. The yield rebound may be limited, with the 7-day repo likely to average 2.0-2.2% this year, and credit growth rising only modestly in the absence of a sharp rebound in real-estate lending. We expect 10-Year CGB yields to fall to 2.70% by end-Q1, before ending the year at 2.80%.”

• “2022 will see a rare divergence of monetary policy between China and most DM economies. The PBoC will likely ease more, as growth has fallen below trend ahead of the 20th Party Congress while domestic inflationary pressure remains limited. The authorities emphasised growth stabilisation as this year’s top policy priority at the annual Central Economics Work Conference (CEWC) and set a more proactive economic policy for this year. Our economists expect Q4-2021 real GDP growth to ease to 3.6% y/y (or 3.2% by consensus), and H1 growth may remain sub-trend on a continued zero-COVID policy, weakening labour market, and pressure in the property sector.”
• “More supportive measures and/or even a modest relaxation of the domestic COVID-containment policy could lead to stronger growth in H2, taking full-year 2022 GDP growth above the likely target of 5.0%. We see a risk of more material monetary policy easing in H1, including more broad-based reserve requirement ratio (RRR) cuts, in addition to targeted measures through re-lending and re-discounting facilities. While our base case is for no change in the medium-term lending (MLF) rate in 2022, we cannot completely rule out a 5-10bps cut in H1 following a 5bps cut in the loan prime rate (LPR) and a 25bps cut in the re-lending rate in December 2021.”
• “Primary supply will stay high and frontloaded. We forecast a slight decline in the government’s official budget deficit to CNY 3.5tn and a lower local government project bond quota of CNY 3.2tn, due to sizable carryover from last year’s utilised fiscal funds. We expect gross issuance to rise by 8% to a new high of CNY 15.5tn, while net issuance is estimated to decline by 7% to CNY 6.7tn. Local banks’ demand for bonds should increase, and funds may become the biggest bond buyers in the next 3-5 years. Foreign inflows may rise steadily to CNY700-800bn, on relatively high carry and likely better returns.”