Over the month of May, 10 -year Chinese onshore government bond yields dropped by 15 basis points. This movement can be explained by a risk off market sentiment due to escalating trade war tensions and series of weak economic data.
In the April monthly update, we’ve mentioned below statements and they still hold for the current market condition and even very likely for months to come: We believe that China is still far away from fully stabilizing and that the Chinese government will need to continue to support growth through fiscal and monetary policy. Also, with a China-US trade deal going increasingly off the horizon, Chinese government bond prices will be supported in the medium term.
In the long run, Chinese sovereigns should also benefit from a gradual opening of the Chinese bond market through increased foreign demand, as evident in bond connect statistic we will show later. We believe that foreign investors will continue to find these securities attractive because Chinese government bonds are less correlated to other major markets while at the same time offering higher risk-adjusted returns in a yield-starved environment.
In late May, one credit event that caught market’s close attention is that Baoshang Bank, a small local commercial bank based in Inner Mongolia Autonomous Region, would be taken over by China’s central bank PBOC for one year. The main reason behind, according to media conference, is that major shareholders’ appropriation of capital led to liquidity mismatch. PBOC confirms repeatedly that this is a non-common singular event and injected liquidity into market via OMO afterwards.
Implications of this credit event are multifold. The immediate aftermath may be stressful, as evident in interbank funding market. The fund spread between large and small-to-medium banks keeps widening, gauged by their 7-day repo proxies.
While the long term positive effects are frequently mentioned by senior market analysts. One key positive effect is that implicit guarantee in banking industry is now broken. This can greatly increase the credit pricing and capital resource allocation efficiency. Also the initiative to improve current tiered funding market structure may be on banking regulator’s agenda which can help boost liquidity into SME sectors. These are beneficial for the long term sustainable development of China’s financial markets and Chinese economy as a whole.
Bond connect flash report
In May 2019, another 108 investors were onboarded during the month, joining the growing Bond Connect community of 947 global institutional investors. Bond Connect introduced the first batch of investors from New Zealand, expanding the span of coverage to 28 jurisdictions. The scheme has attracted 62 out of the top 100 global asset managers, including 55 that have already onboarded. For the first time ever, US overtook Hong Kong with the highest market share for accounts opened in Bond Connect. The US investor base saw the most rapid Bond Connect adoption among all jurisdictions, accounting for 28% of overall investor base. This is followed by Hong Kong, UK, Taiwan, Luxembourg, Singapore, Japan, Canada, Switzerland, Germany, etc.
Bond Connect monthly trading volume and average daily turnover both reached record highs, hitting RMB 158.6 billion and RMB 7.55 billion respectively in May 2019. May 21 particularly saw a record high at RMB 12.1 billion, the highest turnover on a single day since the launch of the scheme. Global investors were net buyers of Chinese bonds for RMB 52.2 billion. Policy financial bonds, NCDs, and Chinese government bonds remained as the focus with a turnover of RMB 75.6 billion, RMB 47.7 billion, and RMB 26.4 billion, respectively, accounting for 47.7%, 30.1% and 16.6% of the monthly trading volume. In terms of tenor, bonds with maturity under 1 year and from 7 to 10 years took up 35.5% and 38.5% of the activities.
In the primary market, 31 new issues equivalent to RMB 109.6 billion were marketed via Bond Connect in May 2019.