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China’s Market News: Bond Prices Remain Elevated Despite PBOC Actions

China’s Market News: Bond Prices Remain Elevated Despite PBOC Actions

Renee Mu, Currency Analyst

This daily digest focuses on market sentiment, new developments in China’s foreign exchange policy, changes in financial market regulations and Chinese-language economic coverage in order to keep DailyFX readers up-to-date on news typically covered only in Chinese-language sources.

- The PBOC continued the new short-term credit strategy; yet, it has not fully cooled the bond market.

- NDRC will set up a national fund worth 40+ billion Yuan in the effort of supporting private investment.

- Chinese leading oil companies reported major contractions over the first half of 2016.

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Sina News: China’s most important online media source, similar to CNN in the US. They also own a Chinese version of Twitter, called Weibo, with around 200 million active usersmonthly.

- The PBOC continued the tweaked short-term credit strategy by adding liquidity through 14-day reverse repos for the second consecutive day on Thursday. The Central Bank sold 80 billion Yuan of 14-day reverse repos on the day which has a higher interest of 2.40% than the 2.25% of 7-day reverse repos. As a large amount of 7-day reverse repos matured on Thursday, the PBOC also issued new 7-day reverse repos worth 140 billion Yuan in the effort of meeting the liquidity need. The Central Bank’s moves over the past two days are being utlized to curb the cheap short-term borrowing that has been used to purchase longer term bonds.

Following the liquidity injections, the onshore Yuan’s benchmark borrowing rates continued to increase: SHIBOR 2W (which is the 14-day borrowing rate) rose the most, up by +0.60 basis points; SHIBOR O/N, 1W and 1M increased +0.10, +0.20 and +0.22 basis points respectively. However, the PBOC’s move has not fully control drops in the yield of Chinese 10-year government bond: the yield fell to 2.773% on Thursday from 2.781% a day ago. Also, on August 23rd, the yield of 10-year bonds issued by China Development Bank, which are considered to be backed by the Chinese government as well, fell below expectations and below yields in the secondary bond market. This indicates that the heat in Chinese bond prices has not fully cooled despite the PBOC’s moves and thus, we will likely to see further action from the Central Bank over the following days.

Hexun News: Chinese leading online media of financial news.

- The Deputy Director from National Development and Reform Commission (NDRC) Lin Nianxiu said on Thursday that China will set up a national fund worth more than 40 billion Yuan in the effort of supporting innovation and private investment. NDRC has submitted the plan to the State Council for approval and the fund is expected to be set up in the following months of 2016. China’s private investment has dropped to 2.1% in July from the peak level of 30.9% in February 2012. The challenge for private investors is that they are lacking opportunities; therefore, the Chinese government has issued a couple of guidelines for them this week, including a list of national projects addressed in the 13th Fifth plenum and a list of Public-Private-Partnership projects.

China Finance Information: a finance online media administrated by Xinhua Agency.

- Chinese leading oil companies reported major contractions in the first half of 2016, amid domestic production cuts and weakness in global oil prices. PetroChina, China’s largest oil producer, reported that the company’s profit in the first six months plunged -97.9% to 531 million Yuan from a year ago; the profits in the first half of 2015 and 2014 were 25.4 and 68.1 billion Yuan respectively. The earnings performance of another state-owned oil producer, China National Offshore Oil Corporation, was even worse: the company had a loss of 7.74 billion Yuan in the first half of 2016; this is the first negative profit ever since the company was listed in 2001. PetroChina forecasts that oil prices will likely remain at low levels over the following months of 2016, which hints at further contraction in the Chinese oil industry.

- Hong Kong Exchanges and Clearing Limited Chief Executive Charles Li said that foreign investors will be able to trade over 8800 Chinese stocks listed on Shenzhen Stock Exchange through the trading link with Hong Kong that is soon to be launched. At the same time, mainlanders will be able to trade over 120 Hong Kong stocks through the link. He also mentioned the probability of introducing bond and currency links between the two markets in the future. These links may provide additional accesses for global investors to meet their increasing demand in Yuan-denominated assets, especially after Yuan’s official inclusion in SDR basket on October 1st.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.