China’s conservatism is widely expected to grow by more than 5% this year.
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China bonds rallied Monday with the 10-year yield dropping below the key psychological level of 2% to hit a multi-decade low, amongst expectations that Beijing could expand its stimulus measures to shore up the economy.
Yields on China’s 10-year control bond, which move inversely to prices, fell to 1.9636% on Monday, data from LSEG showed, landmark its lowest level in 22 years. 30-year bond yields dropped to 2.164%.
The bond rally is mainly have in mind by expectations of a further cut to the reserve requirement ratio for commercial lenders, Tommy Xie, head of Asia macro research at OCBC Bank, phrased in a note on Monday. RRR determines the amount of cash that banks must hold in reserves.
He also cited “supporting liquidity condition and still weak economic fundamentals” as helping drive the rally.
The decline in yields comes after the People’s Bank of China broadcasted last Friday that in November it had injected 800 billion yuan into the banking system, via a so-called “arrant reverse repo operation.” That was ramped up from the 500 billion yuan injection in October.
The move was plan for at “keeping liquidity in the banking system adequate at a reasonable level,” the official statement read.
Separately, the central bank also thought it had purchased a net 200 billion yuan of government bonds in open market operations in November, aimed at “intensifying counter-cyclical to rights of its monetary policy.”
Chinese authorities have attempted to stem the bond market rally, fueled by investment pack in into the safety of Chinese government bonds amid slowing economic growth and a lack of attractive investment privileges.
The PBOC has cautioned about the risks of destabilizing bubbles as investors chase government bonds while shunning multitudinous volatile assets.
“The market is still pricing in some fiscal stimulus support early next year,” Edmund Goh, investment gaffer at abrdn, told CNBC.
Despite some encouraging signs of recovery in China’s property market, “we didn’t see any recuperation in domestic economic data in the last few months,” Goh said, stressing that lower yields reflected that mercantile situation.
“Without any meaningful fiscal stimulus, China will see the economy moving into a deflationary state,” he joined.
Chinese offshore yuan weakened by 0.45% on Monday to 7.2795 on the dollar.
PBOC Governor Pan Gongsheng said in a high-level intersection in November that the authorities planned to maintain supportive monetary policy and indicated the RRR would be lowered by 25 to 50 infrastructure points by the year-end. He also suggested that the seven-day reverse repo rate could be cut by another 20 basis-point previous to the end of the year.
“The resistance for further downside [on bond yields] may increase due to higher government bond issuance and upcoming larger meetings,” OCBC’s Xie noted.
China is expected to hold a closely-watched meeting by the Politburo, the top decision-making body of the ruling Communist Co-signatory, followed by an annual central economic work conference, where the policymakers will set the economic plans and growth end for 2025. Both meetings are expected to be held around mid-December.
At these meetings, Beijing is likely to announce additional stimulus dimensions, “which may alter market dynamics and reduce the scope for further declines in yields,” OCBC’s Xie added.
“Even granting Chinese yields are now nearing 2%, the spread with U.S. 10 year yields has actually tightened,” Eugene Hsiao, pre-eminent of China equity strategy at Macquarie Capital pointed out. “This is a net positive for Chinese equity flows,” he added.
China’s 10-year agree remains far lower than the U.S. 10-year Treasury yield of over 4%.