China bonds mixed ahead of MLF decision

No rates increase expected; US elections likely to influence PBoC policy and cash bonds yields nearing peak, says analyst

China bonds mixed ahead of MLF injection
Presidential race in the US is likely to influence Chinese monetary policy in the coming weeks.

(ATF) Chinese corporate bonds fell for a third consecutive week as the central bank showed few signs it would add more stimulus to the economy. 

The People’s Bank of China (PBoC) offers its latest decision on the Medium-Term Lending Facility (MLF) on September 15. But policy makers are expected to hold the key gauge steady, lowering the relative appeal of higher-risk debt, such as company bonds.

The flagship China Bond 50 index retreated 0.08% on Friday taking its losses for the week to 0.16%. The ATF ALLINDEX Corporates and Enterprise sub-gauges lost 0.14% and 0.01%, respectively on Friday. The ATF ALLINDEX Financial and Local Government inched up 0.01%.

Analysts expect no broad-based easing next week, as China has held the MLF rate steady for the past five months, said Becky Liu, head of China macro strategy at Standard Chartered in Hong Kong.

“The Chinese government is still very keen to bring down the cost of funding for corporates, but we are two months away from the US election so China will stay relatively defensive,” Liu said.

The rate on China’s one-year MLF is 2.95%, while the one-year and more-than five-year Loan Prime Rates are 3.85% and 4.65%, respectively. 

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“Cash bond yield is nearing a peak,” said Liu. “We see value in treasury bonds of maturities between three to five years, but we are less optimistic about long-dated paper given heavy primary market issuance of local and state government bonds expected until the end of October.

“The belly of the curve is likely to outperform the back-end of the curve so we are looking at a steepening of the China treasuries yield curve.”

Liu said that the China interbank and treasury bond yields have already rebounded by 150 basis points since the rout in China government bond yields which began in May, and she doesn’t see much room for these to rebound further.

However, the US elections combined with relatively robust credit growth domestically and the country’s continued economic recovery, signal that there is also not much room for interest rates to come down either. 

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As Democratic nominee Joe Biden leads Republican president Donald Trump in the national polls, Trump may seek to step up pressure on China to enhance his standing at the ballot box, Liu explained. As a result, China will be seeking to guard against any potential adverse consequences. 

“Trump has a higher incentive to put pressure on China if he is behind Biden in the polls and this risk is creating a relatively unstable environment for China,” said Liu. “The Chinese authorities would prefer not to ease monetary policy now in case there is an escalation of tensions with the US which could lead to capital outflows or excessive depreciation of the local currency.”