Photographer: Qilai Shen/Bloomberg

Top-Ranked Researchers Flag China Bond Risks as Inflation Surges

Updated on
  • Investors should note rising chances of stagflation: Haitong
  • Stimulus could reverse economic downturn, JZ Securities says

China’s accelerating consumer prices and a slowing economy are raising the chances of stagflation and increasing the risk to bonds, according to the nation’s top-ranked fixed-income analysts.

A Haitong Securities Co. research team, graded the best by China’s New Fortune magazine in 2015, issued the warning after data Thursday showed consumer inflation accelerated 2.3 percent in February, the fastest pace in 20 months. The producer-price index extended a record run of declines to 48 months.

The People’s Bank of China has lowered benchmark interest rates six times since November 2014 and cut lenders’ reserve-requirement ratios to shore up an economy that expanded at the slowest pace in a quarter century last year. The measures helped drive up new yuan loans and total social financing to all-time highs in January, and spurred M1 money supply to grow at the quickest rate in five years.

“The risk of stagflation is rising,” Haitong Securities analysts led by Jiang Chao wrote in a note. “Given the high correlation between China’s M1 and inflation, CPI is likely to rebound to 2.4 percent this year from 1.5 percent last year. Hence investors should become more cautious in bond investments.”

The yield of sovereign notes due January 2026 fell two basis points to 2.86 percent as of 4:30 p.m. in Shanghai, according to National Interbank Funding Center prices. The yield on the similar-maturity benchmark dropped four basis points on Wednesday, the most since Jan. 29, after rebounding 21 basis points from a seven-year low reached in January, ChinaBond data show.

It would be a mistake for investors to get too bearish on the Chinese economy, said Deng Haiqing, chief economist at JZ Securities Co. With the stimulus effect kicking in, the cyclical downturn could be reversed this year, leading to a correction in the bond market, Deng wrote in a note Thursday.

The PBOC auctioned 20 billion yuan ($3.1 billion) of seven-day reverse-repurchase agreements on Thursday, keeping the interest rate unchanged at 2.25 percent. The central bank has injected 95 billion yuan via open-market operations so far this week, compared with 320 billion yuan of maturing contracts that will drain liquidity.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, fell one basis point to 2.29 percent, data compiled by Bloomberg show. The seven-day repo rate, a gauge of interbank funding availability, rose two basis points to 2.28 percent, National Interbank Funding Center prices show.

— With assistance by Helen Sun

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