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Beijing Blasé as Government Bond Yields Keep Climbing

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10/16/2017 | 12:30pm CET
By Shen Hong 

SHANGHAI--Chinese government bond prices dropped to their lowest in nearly three years, just before a major Communist party congress and after a top economic official signaled confidence in strong growth over the rest of this year.

The yield on the benchmark 10-year government bond rose to 3.71% Monday, up from 3.67% Friday and its highest since December 2014. Bond prices fall when yields rise.

Market participants cited recent solid economic data and central bank Gov. Zhou Xiaochuan's weekend prediction that the economy will grow at about a 7% pace in the second half of 2017.

Beijing's apparent lack of concern over the recent bond selloff contrasts with its heavy intervention to damp stock- and currency-market movements before top leaders kick off their twice-a-decade conclave later this week. The meeting is expected to entrench President Xi Jinping's position atop the party.

"The selloff is mostly due to the recent slew of strong economic data. When the economy is looking good, bond prices will have to fall, simply as that," said Qu Qing, chief fixed income analyst at Hua Chuang Securities.

China's bond market has come under periodic pressure in the past year, as Beijing has raised short-term interest rates and tightened liquidity to discourage borrowing by speculative investors. The comments from Mr. Zhou, the governor of the People's Bank of China, reinforcing authorities' determination to cut ballooning debt--particularly in the corporate sector--appear to have reassured investors.

"Our expectations are indeed that the authorities will continue to push through the deleveraging campaign after the 19th Party Congress," said Liu Yi, an analyst at Guotai Junan Securities.

Moreover China in the past week has reported strong trade numbers, with both exports and imports higher in September. And while consumer-price inflation slowed last month, data Monday showed, a surprise acceleration in producer prices suggested it could be headed back upward.

Even so, the latest bond selloff has come at a sensitive time, when regulators have taken extraordinary measures to preserve wei wen (financial-market stability). The authorities are more relaxed about bonds because the market is dominated by institutional investors, steadier than the retail investors who still dominate domestic stock markets, said Mr. Liu.

"State-run banks account for close 70% of bond trading in China, but if any of them loses money, can you imagine anybody protesting in front of the PBOC's headquarters like retail investors would do?" said a Shanghai-based senior bond trader at an Asian bank.

That strong economic numbers are behind the fall in bond prices mean Beijing has less reason to worry, said Mr. Qu. Authorities want stable bond markets, he said, but their way of accomplishing that is to maintain steady funding conditions in the money market.

While the yield on the 10-year government bond has risen 0.11 percentage point in the past month, the average yield on five-year AAA-rated corporate debt--a measure of financing costs for businesses--has stayed steady at 4.82%.

"This means the actual borrowing costs in the real economy haven't gone up that much, which is another reason why the PBOC doesn't appear concerned," said Mr. Liu.

Write to Shen Hong at [email protected]

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