Market Summary
Yield Movements

The local currency (LCY) government bond yield curve of the Peopleís Republic of China (PRC) shifted strongly upward between 1 March and 15 May for all tenors. Yields gained the most for tenors of 5 years or less, with yields rising between 60 basis points (bps) and 67 bps. For tenors longer than 5 years, yields rose between 15 bps and 54 bps. As a result of the much faster rise at the short-end of the curve, the 2-year versus 10-year yield spread fell to 19 bps on 15 May from 60 bps on 1 March.

The rise in yields in the PRC was largely due to efforts by the government to reduce credit risk in its financial markets through a mix of regulatory and market-based measures.

Size and Composition

The PRCís outstanding LCY bonds rose 0.8% quarter-on-quarter (q-o-q) and 17.2% year-on-year (y-o-y) to reach CNY49.9 trillion (USD7.2 trillion) at the end of March. Growth in the PRCís bond market was driven mostly by increases in government bonds outstanding, which gained 1.6% q-o-q and 26.3% y-o-y to CNY35.1 trillion. Corporate bonds outstanding declined in the first quarter of 2017, falling 1.2% q-o-q and growing only 0.03% y-o-y to CNY14.8 trillion at the end of March, due to the PRCís deleveraging efforts.

Policy, Institutional and Regulatory Developments

In February and March, the PRC announced new rules governing the issuance of local government bonds in the first quarter of 2017 to limit the credit risk of local governments. The regulations will limit the total amount that a local government can issue, subject to a formula. In addition, local governments cannot issue more than 30% of the quota in a single quarter. Funds sourced from bonds issued from the debt swap program can only be used for the repayment of debt. The PRC also raised the quota of local government bond issuance from CNY17.2 trillion to CNY18.8 trillion.