The People’s Republic of China’s (PRC) government bond yield curve shifted downward in October from September, reflecting expectations of an end to the monetary tightening efforts of the People’s Bank of China (PBOC). Yields declined the most on the shorter-end of the curve, falling between 34 basis points (bps) and 47 bps on tenors of 1 year or less. For tenors longer than 2 years, yields fell 17 bps–30 bps.

The amount of outstanding local currency (LCY) bonds in the PRC market reached CNY20.7 trillion at end-September, representing a y-o-y increase of 3.5% and a quarter-on-quarter (q-o-q) rise of 0.5%.  LCY government bonds outstanding fell 0.7% y-o-y and grew only 0.1% q-o-q as in 3Q11, while corporate bonds rose 20.0% y-o-y and 1.8% q-o-q. In the government sector, the y-o-y decline was due to a drop in central bank bonds outstanding, which fell 52.4% y-o-y and 24.0% q-o-q. In contrast, treasury bonds grew 13.7% y-o-y and 4.8% q-o-q, while policy bank bonds grew 26.3% y-o-y and 5.8% q-o-q. 

The People's Bank of China announced that for the purposes of calculating required reserves, margin deposits, such as those paid for issuing bankers’ acceptances, letters of guarantee, and letters of credit would all be included. The amount to be set aside as reserves will be divided over stages to allow banks time to adjust, with the largest banks asked to set aside the reserves over three stages and the smaller banks over six stages. The increase in reserves is estimated to be the equivalent of a 100 bps–150 bps hike in the reserve requirement ratio.