Market Summary

Yield Movements

The People’s Republic of China’s (PRC) government bond yield curve fell between 1 June and 15 August. The entire yield curve shifted downward by an average of 18 basis points (bps), with the shorter-end declining by a much larger amount. Yields fell due to a combination of weaker economic growth and rising risk aversion due to ongoing trade war making other investments such as equities less attractive to investors.

Size and Composition

The PRC’s local currency bonds outstanding rose 3.8% quarter-on-quarter (q-o-q) and 15.1% y-o-y to reach CNY59.8 trillion (USD 9.0 trillion). The PRC’s bond market q-o-q growth rate quickened from the previous quarter’s 1.3%. The PRC’s government bond market’s growth rate accelerated to 4.4% q-o-q in Q2 2018 from 0.8% q-o-q in Q1 2018. The faster growth rate was largely due to gains in the category of “Treasury Bonds and Other Government Bonds” which expanded 5.1% q-o-q in Q2 2018, up from 0.7% q-o-q in the previous quarter. The PRC’s corporate bonds outstanding grew 2.1% q-o-q in Q2 2018, down from Q1 2018’s growth of 2.4%. 

Policy, Institutional and Regulatory Developments

On 24 June, the PBOC reduced the reserve requirement ratio of some banks by 50 bps. Specifically, the following larger banks, and 12 joint-stock commercial banks, must use freed-up funds to carry out debt–equity swap programs: Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, and Bank of Communications. In addition, Postal Savings Bank of China, city commercial banks, non-county rural banks, and foreign-funded bank must use funds freed up by the reduction to support lending to small- and micro-sized enterprises.