China bond yields fall after PBoC liquidity boost - Financial Times

China bond yields fall after PBoC liquidity boost

Cash injection drives down 10-year benchmark from three-year high

Don Weinland in Hong Kong and Yuan Yang in Beijing

China’s central bank injected the largest amount of reserves since January into the financial system on Thursday, a move that stemmed recent weakness in government bond prices that has driven the 10-year benchmark yield to its highest level since late 2014.

Bond market concerns have intensified this past week as China’s policymakers reiterated their determination to reduce the economy’s reliance on debt-fuelled growth. Jitters have been accompanied by global investors cutting their exposure across emerging markets, with notable swings seen in prices for commodities such as metals and oil.

China’s benchmark 10-year yield has steadily climbed from 3.60 per cent since late September to above 4 per cent this week, a level not seen for three years. The yield eased to 3.98 per cent late on Thursday from an intraday day peak of 4.015 per cent after the People’s Bank of China injected Rmb310bn ($47bn) into the financial system.

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While the liquidity boost was aimed at calming the market, analysts said the PBoC had no clear target and that yields could rise beyond 4 per cent again without furthe

“They don’t want the market to panic but I don’t think they have a set target,” said Zhou Hao, senior emerging markets economist at Commerzbank in Singapore.

Last month, during the Communist party congress, Zhou Xiaochuan, the outgoing PBoC governor, bluntly highlighted the risks from excessive debt and speculative investment facing the country.

Loose monetary conditions in China have helped keep bond yields artificially low as liquidity — often in the form of stimulus intended to support the economy — has flowed into financial market.

That trend has masked concerns over the build-up of bad debt and a slowdown in China’s economy. Only as the central banks has held off on adding liquidity to the system have those fears been priced in.

“There should be a credit-risk premium but yields have been distorted by all the liquidity,” said Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets in Hong Kong. “This year they have stopped the liquidity and the bond market is only now catching up with reality.”

Yields remained steady during the party congress in October as banks, mutual funds and other state-backed institutions — often referred to as the “national team” for their role in stabilising the market — continued to buy sovereign debt.

Some of that activity has recently tapered following signals that the government planned to rein in credit growth.

“Investors, in particular mutual funds which have become the second-largest buyer of China’s government bonds, had previously bought sovereign debt because they had assumed the government would loosen [credit] in the fourth quarter in order to achieve the GDP growth target,” said Jonas Short, Beijing head of Sun Kai Hung Financial, an investment bank. “But the realisation that in fact there will be no loosening whatsoever has triggered the sell-off.”