China Bonds Snap Four-Day Drop on Prospects for Monetary Easing

China’s five-year government bonds rose, snapping a four-day decline, on speculation the central bank will cut the reserve requirement for lenders or lower interest rates as the world’s second-largest economy slows.

A government report tomorrow may show consumer prices increased 1.7 percent in July from a year earlier, the least since January 2010, according to the median estimate in a Bloomberg News survey. The moderation in inflation in recent months provides “bigger” room for monetary policy, according to a front-page commentary in today’s Financial News, a newspaper owned by the central bank.

“A reserve-requirement cut is long overdue,” said Suan Teck Kin, an economist at United Overseas Bank Ltd. in Singapore. “That may come after the release of data as policy makers are still assessing the situation.”

The yield on the 3.14 percent bonds due February 2017 fell three basis points, or 0.03 percentage point, to 2.81 percent in Shanghai, according to the National Interbank Funding Center.

China’s economy expanded 7.6 percent in the second quarter from a year earlier, the least since March 2009. Another government report tomorrow may show retail sales rose last month at the slowest pace since February 2011, according to a separate Bloomberg survey.

Bond Auction

The economic slowdown isn’t temporary and constitutes a trend, Li Zuojun, vice director of resources and environment at the State Council’s development research center, wrote in the Shanghai Securities News today. Annual growth may ease to about 7 to 8 percent from 2016 to 2020 and to 5 to 6 percent from 2020 to 2030, according to the article.

China sold at least 30 billion yuan ($4.7 billion) of seven-year bonds at a yield of 3.1561 percent today, said a trader at a finance company that participates in the auctions. That compares with the median estimate in a Bloomberg survey of 3.14 percent.

The People’s Bank of China also gauged demand for a sale of seven-day reverse-repurchase agreements tomorrow, according to a trader at a primary dealer required to bid at the auctions.

The seven-day repurchase rate, which measures interbank funding availability, increased one basis point to 3.26 percent in Shanghai, a weighted average compiled by the Interbank Funding Center shows. The one-year interest-rate swap, the fixed cost to receive the seven-day repo, rose three basis points to 2.81 percent, data compiled by Bloomberg show.

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