US economy

China Bonds Rally, Broker Shares Jump on Bets PBOC May Ease Soon




(Bloomberg) — China’s government bonds rallied, pushing the benchmark yield down by the most since July, amid bets the central bank will soon ease monetary policy to aid growth. 

The yield on the actively traded 10-year sovereign notes dropped five basis points, the most since mid-July, to 2.85%. Traders grew hopeful of a cut to the amount of cash lenders need to set aside as reserves, after Premier Li Keqiang said last week that such a move could be made to support smaller companies. China’s liquidity-sensitive stocks including those of securities firms surged while high-yield dollar bonds also advanced.

The People’s Bank of China bucked a global trend of normalizing pandemic-era stimulus to ease policy in recent months, as the country’s economy is challenged by a regulatory crackdown on everything from the property sector to technology firms. Yuan-denominated government bonds became one of Asia’s top performers in the past three months on bets Beijing will keep liquidity loose.

“China’s bond yields have room to fall further but the 10-year rate won’t drop much below 2.8% given the market had priced in slower growth and potential easing,” said Yifeng Wang, an analyst at Everbright Securities Co. The PBOC could reduce the reserve-requirement ratio by 50 basis points this month, a move that will unleash 1 trillion yuan ($157 billion) into the banking system, he added.

If history is any guide, an RRR cut could be imminent. Since 2018, PBOC made such moves within two weeks after executive meetings of the State Council or Li’s comments, according to Shujin Chen, an analyst at Jefferies (NYSE:) Financial Group Inc. This time, the reserve-ratio could be reduced in the coming 10 days, she added.

Some 950 billion yuan of medium-term policy loans will mature on Dec. 15, and the PBOC could slash RRR to help lenders repay the debt, state-run Securities Daily reported, citing Zheshang Securities Co.

Shares Advance

The CSI 300 Financials Index rose much as 2.4%, the most in nearly a month. Six of the top ten best performers on the benchmark CSI Index were securities firms, which benefit from looser liquidity conditions. A Bloomberg gauge of mainland-listed China brokerages climbed as much as 3%.

Li’s comments come as regulators including the PBOC pledged that market risks surrounding the troubled China Evergrande Group are under control, even as the property firm’s long-awaited debt restructuring may finally be at hand. 

“An earlier than market expected RRR cut should help stabilize and even boost market sentiments,” Li Gang Liu, economist at Citigroup (NYSE:) wrote in a note. He expects financing needs of developers to be supported, which would help ease market concern over a worsening liquidity condition of the property sector.

China’s high-yield dollar bonds rose as much as one cent on the dollar on Monday. Sunac China Holdings Ltd. 5.95% 2024 note was indicated up 4.6 cents on the dollar to 66.4 cents as of 11:05 a.m. in Hong Kong, according to Bloomberg-compiled data.

(Updates with stocks, credit reaction in second paragraph)

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