Market Summary
Yield Movements

The government bond yield curve of the Peopleís Republic of China (PRC) shifted upward for all tenors between 1 September and 31 October. Excluding the 15-year tenor, the pick-up in yields was most pronounced at the long-end of the curve. The rise in the PRCís yields has been largely driven by concerns over the ongoing deleveraging campaign being conducted by the government to reduce debt levels. As a result of the bigger gains at the long-end of the curve, the 2-year versus 10-year yield spread rose to 42 basis points on 31 October from 34†basis†points†on 1 September.

Size and Composition

The PRCís local currency bonds outstanding rose 5.3% quarter-on-quarter (q-o-q) and 14.2% year-on-year in the†third quarter (Q3) of†2017 to reach CNY54.7 trillion at the end of September. The q-o-q growth rate accelerated from 4.1% in the previous quarter due to faster increases in the amount of both government and corporate bonds outstanding. Government bonds outstanding increased 6.1% q-o-q in Q3 2017, mainly led by local government bonds outstanding, which grew 11.9% q-o-q. The PRCís corporate bonds outstanding grew 3.3% q-o-q in Q3 2017.

Policy, Institutional and Regulatory Developments

In September, the People's Bank of China announced that it would reduce the reserve requirement ratio for banks that meet established lending metrics to small and medium-sized enterprises, and to the agriculture sector. Also, the PBOC removed reserve requirements imposed on the trading of foreign currency forwards. Previously, the ratio was set at 20%.