In the current economic climate in China, there is a concerted effort to stabilize falling yields in the bond market. Analysts at Cinda Securities Co. are projecting a significant increase in net government bond issuance, estimated at 1.4 trillion yuan ($195.7 billion) for this month, a substantial rise from the previous month. Similarly, Huaxi Securities Co. anticipates sales ranging from 1.6 trillion yuan to 1.8 trillion yuan in August. Various financial institutions, including Standard Chartered Plc and Societe Generale SA, are also forecasting a rise in bond issuance.
This uptick in debt issuance coincides with concerns about a slowing economy, expectations of monetary policy easing, and a lack of appealing investment opportunities, all of which have contributed to record-low yields. Despite attempts by policymakers to control the rally, the market has not shown sustained improvement.
While some analysts predict that the surplus in bond supply and recent interventions by authorities may temporarily hinder further bond price increases, they do not foresee yields climbing to levels that would negatively impact the economy. Gary Ng, a senior economist at Natixis SA, highlights the need for local governments to adhere to policy directives, with any concentrated bond issuance providing support for yields. However, the potential for higher yields to impede economic growth remains a concern.
Chinese local government bond issuance, excluding amounts allocated for debt repayment, is expected to reach 760.5 billion yuan in the current quarter, nearly 80% of the total sold in the previous three months. Michelle Lam, a Greater China economist at Societe Generale, emphasizes the necessity for local governments to increase the pace of issuance in light of stronger central government directives to meet growth targets.
Despite projections for increased bond sales and guidance from the People’s Bank of China, some industry experts believe the current demand for safe assets in the market will persist. Traders in China have recently shown renewed interest in purchasing bonds following reports of a contraction in bank loans to the real economy, reflecting weak domestic demand.
Becky Liu, head of China macro strategy at Standard Chartered, does not anticipate a “supply shock” resulting from the heightened issuance of bonds. She points out that the demand for bonds remains strong due to sluggish credit growth, particularly in mortgage lending.
It is worth noting that the information provided in this article incorporates insights from various sources, including Bloomberg data.
