Bond investors watch PBoC for more stimulus

Small declines in ATF indices may be harbinger of things to come as doubts emerge about the effectiveness of measures to boost real economy 

Bond investors watch PBoC for more stimulus

(ATF) The ATF index gauges remained broadly stable on Thursday, as the market anticipates further rate cuts. The benchmark 10-year Chinese bond yield fell again, closing at 2.80%, from a high last week of 2.87%. 

The ATF China Bond 50 index, the flagship gauge, lost 0.03% and closed at 107.05. Muted losses were seen again in the ATF ALLINDEX Corporates and Financials sub indexes, which retreated 0.03% and 0.02%, respectively, while the ATF ALLINDEX Enterprise closed in positive territory, gaining 0.02% and closing at 102.36.

The People’s Bank of China (PBoC) announced an injection of a further 80 billion yuan ($11 bn) into the banking system via reverse repos on Thursday in order to ensure adequate liquidity. The open-market operation followed five daily injections totalling 470bn yuan since last Thursday. 

The ATF ALLINDEX Local Governments retreated 0.11% to close at 117.64. Bonds from the People’s Government of Guangdong Province, the People’s Government of Heibei, and the People’s Government of Xiamen were down 0.11%, 1.16% and 0.78%, respectively. 

Government bond issuance hit 1.14 trillion yuan in May, an increase of  750.5bn yuan year-on-year, the PBoC announced on Thursday. This is the highest in 21 months, according to a research note by Capital Economics. 

China is set to accelerate the issuance of local government bonds to fund major sectors and large-scale projects, Asia Times Financial reported on Tuesday. Special local bonds, which are linked to specific projects that have already been given official clearance, is set to hit 3.75tn yuan this year. 

Aggregate financing

Meanwhile, aggregate financing – a measure of the funds that the real economy gets from the financial system – stood at 3.19tn yuan in May, up 1.48tn yuan, the PBoC stated. Yuan loans grew to 1.55tn, 364.7bn yuan more than the increase in the same period last year. Corporate debt issuance was 297.1bn yuan, up 193.8bn year-on-year.

However, media reports are bringing into question how much of China’s credit growth is actually going to the real economy. Large companies have taken out cheap bank loans and issued low-yielding bonds and put the proceeds of these into structured deposits, a form of high-yielding wealth management product, according to Bloomberg Quint. This means that they have not been paying salaries or shoring up working capital.

The outstanding volume of structured deposits increased to 12tn yuan as of April, Bloomberg Quint said. This is up by more than 2tn yuan from the end of 2019. 

As a result, the regulator has ordered banks to shrink their structured deposits balance, according to ING in a research note. 

Given that bank loans are unlikely to spur the economy in an environment of low demand, the PBoC may defer required reserve ratio cuts until the economy recovers, the Dutch Bank said. However, ING estimates that a rate cut of 10-20 basis points is possible this month as this will affect the interest rate in the bond market where cheaper fundraising will help economic growth.