Low Expectations Despite Government's Economic Stimulus Signals
Bond Investment Demand Surges, Yield Declines
Despite continuous economic stimulus signals from the authorities, China's long-term government bond yields continue to decline. This is due to increased demand for bond investments as market expectations for economic recovery have not improved.
According to Chinese economic media Caixin on the 27th, the 30-year government bond yield in China fell to 2.51% at one point, and the 10-year yield dropped to 2.36%, both hitting record lows. The decline in long- and ultra-long-term government bond yields has continued since the end of last year. This year alone, the 30-year government bond yield has fallen by 0.3 percentage points (P), and the 10-year bond yield has dropped by nearly 0.2 P.
The decline in government bond yields means that bond trading has become more active, leading to an increase in trading prices. Recently, the central bank, the People's Bank of China, cut the 5-year Loan Prime Rate (LPR) by 0.25 P, continuing its monetary easing policies. Typically, central bank monetary easing is interpreted as a signal to stimulate the economy, which usually reduces demand for bond investments. However, despite this, the bond market enthusiasm has not cooled, and the downward trend in government bond yields continues.
The market expects further monetary easing attempts by the authorities. Wang Tao, UBS China's chief economist, forecasted that interest rates will be cut by an additional 0.1 to 0.2 P this year, and the reserve requirement ratio will be lowered by 0.25 P. He also anticipated the use of additional tools such as Pledged Supplementary Lending (PSL). Nomura Securities also predicted in a report that the People's Bank of China will cut the Medium-term Lending Facility (MLF) rate and LPR again within the second quarter.
Caixin explained, "The reason why the bond market enthusiasm has not subsided is that market expectations for economic fundamentals remain weak," adding, "Fundamentally, the weak recovery expectations have not yet reversed."
At the upcoming Two Sessions (National People's Congress and Chinese People's Political Consultative Conference) starting on the 4th of next month, the authorities are expected to present specific directions for economic stimulus measures. Premier Li Chang's work report, considered the biggest event of the NPC, will reveal this year's economic growth target, economic policy directions, and budget.
The prevailing view is that this year's economic growth target will remain around 5%, similar to last year. However, unlike last year, it is difficult to expect the same base effect, and concerns about deflation (price decline amid economic downturn) persist. Therefore, there are growing calls for the authorities to introduce bold stimulus measures to achieve the target.
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