Traders have ratcheted up bets on Chinese monetary easing to the most since November on signs the economy’s post-Covid recovery is running out of steam.
The cost of 12-month interest-rate swaps, which anticipate where interest rates will be in a year’s time, slipped to 2.06% this week, down from as high as 2.47% just over two months ago. At the same time, the nation’s benchmark 10-year bond yield dropped to a six-month low of 2.70% this week.
Data in recent weeks have added to signs the rebound of the world’s second-largest economy from its protracted pandemic lockdowns is sputtering. April readings for industrial production, retail sales and fixed investment all missed economists forecasts, while consumer prices barely grew and imports slumped, bolstering calls for more policy support.
The People’s Bank of China doesn’t want to go back to flood the system with money but the economy may not be resilient as they thought, Chi Lo, a strategist at BNP Paribas Asset Management in Hong Kong, said on Bloomberg Television. “We’ll have to see the authorities come back with more conviction to tell markets that we are really here to protect growth not just cutting one policy rate, but all of them.”
The PBOC has so far refrained from cutting interest rates despite the slowing economy, most recently keeping its rate on the one-year policy loans at 2.75% for a ninth month last week. At the same time, it did inject more long-term liquidity into the financial system for the sixth month on the same day, after lowering the reserve requirement ratio for banks in March.
Nomura Holdings Inc. is telling its clients to buy China government bonds as the weak economy is likely to drive down yields even further.
The bank advises buying Chinese five-year notes, targeting a decline to 2.30% by the middle of July. The yield close at 2.47% Thursday.
“As China’s economy moves out of the post-Covid sweet spot, Beijing may have to introduce other supportive measures,” rates strategists Albert Leung and Clair Gao wrote last week in a research note. “While the absolute level of China rates versus the rest of the world looks unattractive, China government bonds remain more attractive than most other Asia bond markets on a real-yield basis.”
Weaker Yuan
Others are less bullish on the nation’s debt.
Societe Generale SA says investors should exercise caution in chasing any rally in Chinese bonds as the central bank may be reluctant to cut interest rates given the potential impact on the already weakening yuan.
“Any China rates rally accompanied by a weakening yuan is unlikely to be sustained for long,” Kiyong Seong, a rates strategist at Societe Generale in Hong Kong, wrote in a note.
--With assistance from David Ingles.