Market Summary

Yield Movements

The People's Republic of China's (PRC) yield curve for local currency (LCY) bonds steepened between 31 August and 15 October, driven by a rise in yields at the longer end of the curve and a decline in yields for shorter-dated tenors. Yields rose for tenors of 5 years or longer by an average of 10 basis points (bps), excluding the 9-year tenor, which fell 1 bps. For tenors of 3 years or shorter, yields fell an average of 8 bps. The steepening of the yield curve led to a rise in the 2-year versus 10-year spread to 49 bps on 15 October from 35 bps in 31 August. Yields at the longer end of the curve rose on investor optimism that the PRC's economy would benefit from news that trade tensions between the PRC and the United States were abating.

Size and Composition

LCY bonds outstanding in the PRC rose 3.6% quarter-on-quarter (q-o-q) in Q3 2019 after gaining 4.0% q-o-q in the second quarter (Q2) of 2019. On a y-o-y basis, LCY bonds grew 14.9% y-o-y. The PRC's government bond market continued to grow; however, growth moderated to 3.5% q-o-q from 4.2% q-o-q in Q2 2019. The slowing growth was due to a decline in government bond issuance during Q3 2019. In contrast to the PRC's government bonds, corporate bonds outstanding grew 3.9% q-o-q in Q3 2019, accelerating from Q2 2019's 3.6% q-o-q growth. The growth was largely driven by an in increase in financial bonds (9.2% q-o-q), medium-term notes (3.8% q-o-q), and listed corporate bonds (3.2% q-o-q).

Policy, Institutional and Regulatory Developments

On 6 September, the People's Bank of China announced that it would reduce by 50 bps the reserve requirement ratio of financial institutions, effective 16 September. In addition, rural commercial banks operating solely within provincial administrative regions would be entitled to an additional 100 bps cut, with the reduction to be phased in on 15 October and 15 November. On 15 October, the China Securities Regulatory Commission announced that the total amount of outstanding corporate bonds sold privately would be limited to 40% of a company's net assets. Additional bonds issued exceeding this ratio may only be used to repay existing debt.