A man walks past the People’s Bank of China (PBOC) building on July 20, 2023 in Beijing, China. (Photo by Jiang Qiming/China News Service/VCG via Getty Images
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Chinese bonds rallied to record low yields after the People’s Bank of China announced on Tuesday that it would reduce the reserve requirement ratio for banks, and also cut the reverse repo rate.
China’s 10-year government bond yield fell 3.2 basis points to 2.041%, data from LSEG showed, hitting a record low. The 30-year bond yield fell 0.4 basis points to a record low of 2.168%.
“Yields declined due to larger-than-expected PBOC easing. The 20bp cut was the largest 7-day reverse repo rate since the Covid crisis. While laudable, there are no big interest rate cuts,” said Winson Phoon, head of Maybank. fixed income research.
“Growth prospects should receive a short-term boost to sentiment, but the most important thing is a sustainable recovery in the medium term, which remains unclear,” he said.
PBOC Governor Pan Gongsheng announced in a press conference that China will reduce the reserve requirement ratio or the amount of cash banks need to continue by 50 basis points.
China’s onshore yuan fell to 7.06 against the dollar, according to data from LSEG.
The impromptu high-level press conference was organized after last week’s interest rate cut by the US Federal Reserve, which started an easing cycle that could allow China’s central bank to lower rates further to stimulate growth amid deflationary pressures.
In recent months, insurers and institutional investors have entered China’s bond market, partly because of limited investment opportunities elsewhere. The real estate market has declined, and the stock market has struggled to bounce back from several years of underperformance.
China’s central bank is constantly wary of the risk of a destabilizing bubble as investors flock to government bonds.
In July, the PBOC-affiliated “Financial News” criticized the rush to buy Chinese government bonds, labeling the move a form of “speeding up” the economy.
“This is the only asset in China that is safe,” Alicia Garcia-Herrero, chief Asia Pacific economist at Natixis told CNBC. “The rest – credit, equity, insecurity. It’s increasingly insecure. So everyone is jumping on government bonds.”
Investors with more savings are turning to bonds because there is no access to foreign assets, he added.
PBOC’s Pan indicated that a 0.2-0.25% reduction in the loan prime rate is also on the table, although he did not specify when this would happen or whether he was referring to a one-year or five-year LPR. Late on Friday, the PBOC kept its key benchmark lending rate at current levels in a monthly revision.
“Bond yields should be lower because they are cut to the policy level, which is the 7-day reverse repo. In the meantime, the deposit rate will be lowered which should also favor the bond market,” said Hao Zhou, chief economist at Guotai Junan International. CNBC via email.
