China bond markets barely blink on glut of local govt issuance

SHANGHAI: China's efforts to keep funding markets stable and cheap were on full display this week as a glut of fund-raising by local governments left cash conditions and yields unmoved.

China's local governments were on track to issue about 241 billion yuan ($37.08 billion) worth of bonds this week, according to a Reuters tally of issuance filings, compared with a total of 60 billion yuan for the month of February.

Such concentrated new supply of debt would typically push yields higher, but strong demand from banks has provided an anchor, said a trader at an Asian bank.

The benchmark 10-year Chinese government bond (CGB) yielded 3.2425% on Friday, slightly up on the day but down from 3.2655% a week earlier.

"There are a lot of bearish factors this week, it's just that there's too much money in the market. Rates barely moved even with the big rebound in stocks. The social financing data was great and the market still didn't move," she said.

Credit growth for February was above market expectations, in line with the People's Bank of China's (PBOC) pledge that it would not make sudden policy shifts as the economy recovers from the pandemic.

Consistent with that approach, the PBOC has watched from the sidelines this week, neither injecting cash nor draining it from the banking system through its regular open market operations.

The market's stability contrasts with a rocky start to the year for global peers.

The US 10-year yield has surged nearly 64 basis points this year, as global bonds have been walloped by concerns over rising inflation. The 10-year CGB yield has risen about 11 basis points.

"The correlation of Chinese onshore government bonds stays low versus global bond peers, implying great diversification potential ... (the) PBOC is relatively independent, so less impacted by external shock," said Bruce Zhang, portfolio manager at CSOP Asset Management in Hong Kong.

Unlike in 2019 and 2020, China did not announce an annual quota for local government bond (LGB) issuance before its annual session of parliament began on March 5.

That created concern that local governments would hold back until the quota was announced, and there would be a sudden glut, Kiyong Seong, director of Asia macro strategy at Societe Generale in Hong Kong said in a note.

China set the special LGB issuance quota at 3.65 trillion yuan for 2021, from 3.75 trillion yuan last year.

But noting that the combined local and central government bond issuance pace has been comparable to last year, Seong called the market's bearish consensus "a bit exaggerated".

"We don't subscribe to the notion of a supply overhang pushing China rates higher from here."