Chinese bonds rally on easing hopes, market eyes benchmark rate cut on Thursday

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SHANGHAI, Jan 19 (Reuters) – Yields on Chinese government bonds fell on Wednesday after comments from an official boosted expectations that the country’s key rate would be cut as early as this week to support a slowing economy. economy.

China’s central bank “should hurry up, keep our operations forward-looking, move forward on the market curve, and respond to general market concerns in a timely manner,” the vice-president said on Tuesday. – Governor of the People’s Bank of China, Liu Guoqiang, calling for policies that would contribute to economic stability. Read more

Recent official comments suggest that Beijing is “quite concerned about slowing growth, (and) its pain threshold has almost been reached,” Nomura analysts said.

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“However, policymakers also face many constraints, including the oversupply of properties in most lower-tier cities and the need to stamp out the coronavirus.”

Liu’s comments followed an unexpected reduction in borrowing costs for medium-term loans on Monday, after December economic data showed further weakness in consumption and the struggling real estate sector, two major growth drivers. . Read more

Analysts and traders widely expect the next easing move to come as soon as Thursday, saying cuts to China’s benchmark lending prime rate (LPR) are a done deal.

All 43 participants in a Reuters snap poll predicted a one-year LPR cut for a second consecutive month at its January fixing. Among them, 38 people expected a reduction of 10 basis points (bps), while the other 5 projected a marginal reduction of 5 bps.

Forty respondents also forecast a reduction in the LPR rate over five years for the first time since April 2020 at the height of the pandemic. This included 27 contributors predicting a 10 basis point reduction in the five-year term.

Most new and existing loans in China are based on the one-year LPR, while the five-year rate influences home loan pricing. The one-year LPR is currently 3.8%, while the five-year LPR is 4.65%.

Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis, said a cut in the 5-year rate “will be a key signal to stabilize the real estate sector”.

Beijing has tried to contain soaring house prices and debt levels in recent years, but more developers are defaulting and housing starts have fallen.

As the housing slowdown persists in the first half and sporadic COVID-19 outbreaks dampen consumer activity, many analysts expect further easing measures soon.

“The demand for a strong start after China’s top leaders acknowledged increased downside risks in December 2021 warrants a policy of anticipation,” said Tommy Xie, head of Greater China research at This Week. OCBC Bank.

Xie said reductions in the LPR and RRR (bank reserve requirement ratio) could come in the first quarter. The PBOC had cut both in December.

“In addition, we believe there is also scope for China to further cut the MLF rate by an additional 10 basis points (bps).”

The benchmark 10-year yield fell 5 basis points to a low of 2.71% in early trading on Wednesday, its lowest since June 2020.

But Chinese stock markets – which are typically very sensitive to potential changes in liquidity – fell, with the blue-chip index (.CSI300) ending down 0.68% on Wednesday.

“The bond market rally will persist for some time as investors digest (the developments). I don’t really think the dovish comments from (Liu) were the trigger. Basically, it was the unexpected rate cut.” , said a trader at a Chinese bank, who was not authorized to speak to the media and declined to be identified.

“Don’t fight the central bank,” Qin Han, an analyst at Guotai Junan Securities, said in a note. “Monetary easing is the card on the table.”

EXIT RISKS

The PBOC’s strong easing bias comes at a time when many other major global central banks, including the US Federal Reserve, are poised to tighten monetary policy. The Fed is widely expected to begin raising rates as early as March, with several more increases throughout the year.

Reflecting market expectations of increasingly divergent policy in the two countries, the yield spread between China’s benchmark 10-year government bond and its US counterpart has already narrowed at most. close since May 2019.

This has raised some concerns about potential destabilizing risks from the sale of Chinese stocks and bonds overseas, even as China still maintains a tight grip on capital outflows.

The yuan currency has held up so far on expectations of further easing. It rose slightly on Wednesday, largely thanks to strong demand ahead of the Lunar New Year holiday from Jan. 31.

“The first quarter is the window of opportunity. Going forward, China’s easing room would get smaller and smaller as the Fed starts raising rates,” said Chen Yuanjun, head of securities. fixed income at Jilin Jinta Investment Co.

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Reporting by Andrew Galbraith, Samuel Shen and Winni Zhou; Editing by Jacqueline Wong, Gerry Doyle and Kim Coghill

Our standards: The Thomson Reuters Trust Principles.

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