China bonds rally on easing hopes, market eyes benchmark rate cut Thursday
SHANGHAI, Jan 19 (Reuters) - Chinese government bond yields fell across the curve on Wednesday after an official's comments heightened expectations that the country's benchmark lending rate will be cut as early as this week to shore up the cooling economy.
China's central bank "should hurry up, make our operations forward-looking, move ahead of the market curve, and respond to the general concerns of the market in a timely manner," People's Bank of China Vice Governor Liu Guoqiang said on Tuesday, calling for policies that would help economic stability. read more
Recent official comments suggested that Beijing is "quite concerned about the growth slowdown, (and) its pain threshold has almost been reached," said analysts at Nomura.
"However, policymakers are also faced with many constraints, including property oversupply in most low-tier cities and the need for stamping out the coronavirus."
Liu's comments followed an unexpected cut to borrowing costs for medium-term loans on Monday, after December economic data showed further weakening in consumption and the troubled property sector, both major growth drivers. read more
Analysts and traders widely expect the next easing move to come as soon as Thursday, believing cuts in China's benchmark loan prime rate (LPR) are a done deal.
All 43 participants in a snap Reuters poll predicted a cut to the one-year LPR for a second straight month at its January fixing. Among them, 38 people expected a 10 basis-point (bps) cut, while the remaining 5 projected a marginal reduction of 5 bps.
Forty respondents also forecast a reduction to the five-year LPR rate for the first time since April 2020 during the depths of the pandemic. This included 27 contributors predicting a 10 bps cut to the five-year tenor.
Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of home mortgages. The one-year LPR currently stands at 3.8%, while the five-year LPR is 4.65%.
Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, said a cut to the 5-year rate "will be a key signal to stabilize the real estate sector."
Beijing has been trying to keep a lid on surging home prices and debt levels in recent years, but more developers are defaulting and construction starts have plunged.
With the property downturn seen persisting into the first half and sporadic COVID-19 outbreaks dampening consumer activity, many analysts expect more easing measures soon.
"The demand for a good start after Chinese top leadership acknowledged increasing downside risks in December 2021 warrants policy front loading," Tommy Xie, head of Greater China research at OCBC Bank said this week.
Xie said cuts in the LPR and RRR (banks' reserve requirement ratio) may come in the first quarter. The PBOC had trimmed both in December.
"In addition, we think there is also room for China to cut the MLF rate further by another 10 basis points (bps)."
The benchmark 10-year yield , fell as much as 5 bps to a low of 2.71% in early trade on Wednesday, its lowest since June 2020.
But China's stock markets -- which are usually highly sensitive to potential liquidity changes -- pulled back, with the blue-chip index (.CSI300) ending lower by 0.68% on Wednesday.
"The bond market rally will persist for a while as investors digest (developments). I don't really think the dovish comments from (Liu) were the trigger. In essence, it was the unexpected rate cut," said a trader at a Chinese bank, who was not authorised to speak to the media and declined to be identified.
"Don't fight the central bank," Qin Han, an analyst at Guotai Junan Securities, said in a note. "Monetary loosening is the card on the table."
The PBOC's strong easing bias comes at a time that many other major global central banks, including the U.S. Federal Reserve, are about to tighten monetary policy. The Fed is widely expected to start hiking rates as early as March, with several more increases seen over the year.
Reflecting market expectations of increasingly divergent policy in the two countries, the yield gap between China's benchmark 10-year government bond and its U.S. counterpart has already shrunk to the narrowest since May 2019.
That has prompted some concerns about the risks of potentially destabilising foreign selling of Chinese stocks and bonds, though China still maintains a tight grip on capital outflows.
The yuan currency has been resilient so far in the face of expectations of more easing. It inched up slightly on Wednesday, thanks largely to strong demand ahead of Lunar New Year holidays starting on Jan. 31.
"The first quarter is the window of opportunity. Going forward, China's room for easing would become smaller and smaller as the Fed starts raising rates," said Chen Yuanjun, head of fixed income at Jilin Jinta Investment Co.
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