Market Summary
Yield Movements

The People’s Republic of China’s (PRC) local currency (LCY) government bond yield curve moved upward between 31 October and 18 November except for yields for the 2-year, 4-year, and 6-year maturities. The largest declines occurred at the longer end, with the 5-year tenor rising 21 bps and the 7-year and 10-year tenors rising 18 bps and 16 bps, respectively. The remaining tenors rose between 7 bps and 11 bps, except for the aforementioned 2-year, 4-year, and 6-year tenors. The 2-year and 6-year tenors were unchanged, while the 4-year tenor fell 7 bps. As a result, the 2-year versus 10-year yield spread rose from 35 bps on 31 October to 50 bps on 18 November. The rise in the yield curve was driven by increasing volatility in markets outside of the United States as a result of its presidential election.

Size and Composition

LCY bonds outstanding in the PRC rose 4.2% quarter-on-quarter (q-o-q) and 26.0% year-on-year (y-o-y) to CNY47.9 trillion (USD7.2 trillion) at end-September. Outstanding LCY government bonds grew 6.0% q-o-q and 35.1% y-o-y in the third quarter (Q3) of 2016 to reach CNY33.2 trillion, with all three government bond categories exhibiting slower growth. LCY corporate bonds outstanding rose a marginal 0.3% q-o-q in Q3 2016, following a decline of 0.6% q-o-q in the prior quarter, to reach CNY14.7 trillion at the end of September. Growth was driven by a 4.5% q-o-q increase in commercial bank bonds and Tier 2 notes, and a 4.4% q-o-q increase in local corporate bonds.

Policy, Institutional, and Regulatory Developments

On 30 September, the International Monetary Fund (IMF) announced that it would include the Chinese renminbi in its Special Drawing Rights basket effective 1 October. The IMF said that the renminbi’s inclusion is due to the currency’s increasing role in the international monetary system. Other currencies included in the IMF’s Special Drawing Rights are the US dollar, euro, Japanese yen, and pound sterling.