Market Summary

Yield Movements

The People’s Republic of China’s (PRC) entire government bond yield curve shifted downward between 1 March and 15 May. The yield curve fell an average of 28 basis points, with the largest declines at the shorter-end. Yields for the PRC government bonds followed a general downward trend beginning in March, stemming largely from expectations that the domestic economy would slow down this year.

Size and Composition

The PRC’s local currency bonds outstanding rose 0.7% quarter-on-quarter (q-o-q) and 14.8% year-on-year in the first quarter of 2018 to reach CNY57.2 trillion (USD9.1 trillion) at the end of March. The slower q-o-q expansion was due to declines in the growth rates of both government and corporate bonds. The slowdown of the government bond market reflected the approaching end of the PRC’s local government debt swap program and other efforts to limit the debt risk of local governments. On the other hand, the decline in the growth rate of the corporate bond market was due to q-o-q declines in all other major categories of corporate bonds, with the exception of medium-term notes.

Policy, Institutional and Regulatory Developments

On 16 April, the People’s Bank of China (PBOC) reduced the reserve requirement ratio of banks by 100 basis points, effective 25 April. The PBOC placed restrictions on the funds freed by the reduction, stipulating that they must be used to repay loans from the PBOC’s Medium-Term Lending Facility. Leftover funds must be used for lending to small and micro enterprises.