Market Summary

Yield Movements

The People's Republic of China's (PRC) yield curve for local currency (LCY) bonds shifted upward between 1 March and 8 May with the exception of the 6-month and 4-year tenors . The PRC's yield curve shifted upward by an average of 19 basis points (bps) with the largest gain seen for the 3-year tenor, which rose 35 bps. The 2-year versus 10-year yield spread fell from 59 bps on 1 March to 49 bps on 8 May. The PRC's yields trended upward in April as an anticipated reserve requirement ratio cut failed to materialize. In addition, economic indicators showed better-than-expected economic growth for the first quarter.

Size and Composition

LCY bonds outstanding in the PRC rose 3.0% quarter-on-quarter (q-o-q) in Q1 2019, a deceleration from 3.4% q-o-q growth in Q4 2018. On a y-o-y basis, LCY bonds outstanding grew 16.7%.The PRC's government bonds outstanding grew 2.5% q-o-q in Q1 2019, up from 2.2% q-o-q in Q4 2018. The slightly higher q-o-q growth rate was largely due to increases in local government bonds, which expanded 5.2% q-o-q in Q1 2019 after growth of less than 1.0% in Q4 2018. The PRC's corporate bonds outstanding grew 4.1% q-o-q in Q1 2019, down from 5.9% q-o-q growth in Q4 2018. The slower corporate bond growth was largely due to uncertainties over the PRC's economy.

Policy, Institutional and Regulatory Developments

On 5 May, the PBOC announced that it would reduce the reserve requirement ratios for certain small and medium-sized banks that meet specified criteria. The PBOC said that rural commercial banks with a presence in rural counties and total assets of less than CNY10 billion will have their reserve requirement ratios set at 8%, the same level as credit cooperatives.