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Chinese bond market relatively safe

(ATF) As world markets and US Treasuries fall, Jianghai Securities released an analysis saying the turmoil will continue to benefit China’s domestic bond market.

Some of the measures previously introduced to calm the real estate sector have also been slowly wound back recently, reflecting the firm attitude of decision-makers that buyers and builders should not speculate.

The People’s Bank of China warned on CCTV that real estate is not the answer for short-term economic plans. It insists that housing is for living, not for speculation.

Recent infrastructure investments introduced via special local government bonds will help instead of building “more empty housing”.

The central bank said: “Prudent monetary policy should pay more attention to flexibility and moderation, maintain reasonable and adequate liquidity, improve the macro-prudential assessment system, and release the potential of Loan Prime Rate reform.”

Jianghai Securities said: “The probability of a rapid recovery of fundamentals is not high. Pessimistic expectations of the domestic economy and loose monetary policy are expected to further ferment in the short term.

Short-term decline

“In summary, the domestic bond market is still relatively safe, and the short-term decline in interest rate fluctuations is still a high probability event. Existing positions can continue to be held, and a modest increase in interest rates is recommended.”

The firm sees no recovery in the region and pointed to a “major risk point”, noting that the South Korean government had recently expelled 300,000 foreign illegal workers, sending most of them back to Southeast Asia.

China’s post-holiday interest rate cuts came before the US Fed’s rate, but both moves were to hedge against large fluctuations in the financial markets.

With a short-term economic downturn tipped in the later period, Jianghai said: “More monetary policy relaxation should be needed to stimulate the economy. Therefore, even if the PBOC maintains a wait-and-see attitude in the short term, there is still room for further relaxation of monetary policy in the future. In addition, lower interest rates and lower interest rates in overseas markets can at least ensure that the domestic bond market is relatively safe.” 

It said: “The relative value of bonds, currently.. driven by government bond futures, interest rates on government bonds have fallen rapidly, and they have surpassed China Development Bank.

“The CDB’s 10-year coupon exchange factor has also caused its interest rates to fall more slowly than Treasury bonds in the short term. The current 10-year CDB and Treasury bond interest rate implicit tax rate is 16%, a new high since 2019, which indicates that CDB is more valuable than Treasury bonds.

“In addition, the new 10-year issuance rate is low. In the medium term, a low coupon rate will limit its daily trading activity. Therefore..for a period of time, it will still be the most active coupon.”

Sources: Sina Finance, Quqing Bond Forum, Xinhua, CCTV

Chris Gill

With over 30 years reporting on China, Gill offers a daily digest of what is happening in the PRC.


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