Chinese bond yields down

Chinese bond yields mostly fell on Friday on talk that the central bank may soon step up window guidance to curb lending to corporations, but bill yields were mixed while repo rates rose for a second day in a row. Traders bought bonds on speculation that the central bank may adopt window guidance by the year-end that includes monthly lending quotas to control corporate lending, leaving more cash for banks to park in bond investments.
The rumours follow remarks by several officials this week that China needs to pay attention to risks of an asset price bubble, fuelling expectations that authorities may bring forward the timing for unwinding their ultra-loose monetary policy even though the return of inflation is expected to be mild.
"Rumours that new lending quotas may be imposed are boosting bond buying," said a trader at a major Chinese bank in Shanghai. The indicative five-year government bond yield eased to 3.0926 percent bid on Friday from 3.0945 percent on Thursday, according to Reuters Reference Rates.
Highlighting concern about asset prices, central bank governor Zhou Xiaochuan said on Friday that China needed to maintain a certain spread between deposit and lending rates in order for banks to be able to support the economy. Traders interpreted the comments as suggesting the central bank may want to delay interest rate liberalisation, which was a factor in Japan in the 1980s that caused excessive competition by banks to extend mortgages, inflating property prices.
But traders said any rally in China's bond market may be short-lived amid concerns that the central bank may also use quantitative measures, such as bank reserve ratio hikes or aggressive fund drains in its open market operations, to absorb speculative capital inflows.
The official Shanghai Securities News on Friday quoted Wu Xiaoling, a former People's Bank of China vice governor, as saying China might adjust banks' reserve requirement ratios next year as the country's economy steadies. In the bills market, yields were generally mixed, with money market rates supported on the downside by expectations that the central bank will need to become more aggressive in money drains to absorb capital inflows.
The central bank's third-quarter monetary report said banks' excess reserve ratio had risen to 2.06 percent at the end of September from 1.55 percent at the end of June, suggesting a rising risk of excess liquidity in the banking system. "Money market rates are going to be directionless for now," said a trader at US bank in Shanghai. The weighted average seven-day repo rate rose for a second straight day to 1.4487 percent by midday, from 1.3965 percent on Thursday. But the 90-day central bank bill yield eased to 1.3431 percent on Friday from 1.3445 percent on Thursday.