Chinese government bond yields collapse after government suspends RRR cuts

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SHANGHAI (Reuters) – Chinese government bond yields fell sharply on Thursday after the State Council, the country’s cabinet, said authorities would use timely cuts in reserve requirement ratios (RRRs) for banks to support the economy.

FILE PHOTO: A Chinese yuan note is seen in this illustration photo on May 31, 2017. REUTERS / Thomas White / Illustration / File Photo

While the cabinet said China will maintain a stable monetary policy, investors have referred to the reduction in the RRR – the reserve requirements that banks must set aside – as a strong easing signal.

The Chinese yuan reacted lower, weakening as much as 0.17% to a nearly a week low against the dollar.

One-year dollar / yuan exchange points also fell amid expectations that the yield gap between China and the United States would narrow, although some traders were puzzled that China was reporting a easing, as the US Federal Reserve was due to tighten next year.

And stocks fell as some investors began to worry about slower growth for the rest of the year.[[[[

Since its last targeted RRR reduction in April last year at the height of the coronavirus pandemic, the People’s Bank of China (PBOC) has maintained what it calls a neutral and cautious political stance.

The most-traded contract for 10-year Chinese government bond (CGB) futures, for September delivery, jumped 0.41% early in Thursday, while the yield on government bonds China’s 10-year benchmark fell to 3.037%, according to data from Refinitiv. , the lowest level since August 2020.

CGB futures are up nearly 1.5% from mid-June lows after a slew of weaker-than-expected economic data raised fears that the Chinese economy has peaked and needs a additional support.

The firm’s conciliatory comments again caught many traders and analysts off guard.

Some market participants have said the PBOC is unlikely to take a completely different approach to monetary policy than its global peers, which are expected to cut stimulus measures.

“It doesn’t make sense to relax now until the Federal Reserve tightens next year,” said a trader at a Chinese bank.

Lu Ting, chief economist for China at Nomura, said the shift to easier political settings was not surprising, but waving the RRR card had taken markets on the wrong foot.

“A large-scale tool such as an (an) RRR cutter was a big surprise to the markets and to us,” Lu said.

“Beijing’s policy solutions to soaring commodity prices are consistent with the idea that it will use political easing instead of political tightening to contain rising commodity prices,” he said. said, expecting the PBOC to provide a universal RRR reduction of 50 basis points. in the coming weeks.

The surge in commodity prices pushed Chinese producer prices in May to the fastest pace since the global financial crisis, while consumer inflation was fairly stable and remained below the annual target of 3 %, suggesting that the transmission effect remained limited.

Some traders said the talk of reducing the RRR would not necessarily turn into action. A previous cabinet meeting in June last year also mentioned the use of RRR cuts to support the economy, but no cuts materialized.

Meanwhile, central bank vice-governor Fan Yifei told media on Thursday that China will continue to lower real lending rates and lower the costs of financing small businesses through targeted monetary policy tools. .

More targeted easing may be likely. Zhang Yu, chief analyst at Huachuang Securities, noted that the firm’s proposed RRR cuts are intended to support small businesses, which have continued to drag out a broad economic recovery this year.

“Small and micro-enterprises are now facing a triple pressure: weak domestic demand, rising commodity prices on the supply side and a marginal increase in taxes due to a waiver of contribution cuts. social security, ”she said.

Reporting by Winni Zhou and Andrew Galbraith; Editing by Vidya Ranganathan, Richard Pullin & Simon Cameron-Moore


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