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Emerging Insight

  Emerging Insight: China rates – Bonds supply, liquidity, and mixed policy signals

•  Government bonds supply is likely to be higher in 2H; expect monthly net supply to reach around CNY1tn in Jul and Aug.
•  We expect PBoC to actively provide liquidity facilitation via OMOs and RRR cuts.
•  A slower/weaker economic recovery in the following months could trigger more easing measures. We stay long 10y CGB.
By Janice Xue
Chart of the day: Government bonds supply likely to remain high in Jul and Aug (CNY bn)
 

Source: Wind, BofA Global Research

China in Focus

Government bonds supply, market liquidity, and mixed policy signals 
Government bonds supply is likely to be modestly higher in 2H compared with 1H, and we expect issuance to peak in the summer and gradually decline into 4Q. As argued earlier, we believe PBoC will be more active in facilitating issuance of special treasury bonds and preventing interbank market liquidity from tightening further. 

We think one plausible explanation behind the seemingly contrasting messages from the State Council and PBoC is that the latter tends to take a longer-term perspective when it comes to easing. Holding a cautious view on the medium-term outlook for the domestic and global economy, Chinese central bankers constantly face the trade-off between stimulating the economy now and maintaining their capability to ease when the next economic downturn hits. They also need to balance between different policy objectives. 

We don't think the temporary hold from the PBoC suggests a turn in monetary policy stance. A slower or weaker economic recovery in the following months could be the catalyst for more easing measures, and if that happens, it would also inject a long-awaited dose of optimism for bond market investors. We stay long 10y CGB.