China's Bond Market Bull Run Seen Lasting for Record 10 Quarters

  • Guotai Junan says slowing growth hasn't yet bottomed out
  • HSBC says China bonds `reasonably priced' at current yields

The potential for China’s economy to slow further from its weakest growth in two decades will likely see the bull run in the bond market lasting another three quarters, according to Guotai Junan Securities Co.

The Bloomberg China Local Sovereign Bond Index climbed 17 percent in the past seven quarters as manufacturing, factory output and exports deteriorated. The People’s Bank of China has cut benchmark interest rates six times in 12 months and lowered the amount of cash banks must set aside as reserves four times in 2015, measures that have so far failed to revive the world’s second-biggest economy.

Industrial production rose 5.6 percent in October from a year earlier, the least since March, and a gauge of factory prices has dropped for a record 44 months. A privately compiled Purchasing Managers’ Index of manufacturing and services fell in November, while a measure of business sentiment declined, according to China Minsheng Banking Corp. and the China Academy of New Supply-Side Economics.

“Economic growth is likely to slow further in 2016,” Guotai Junan analysts Xu Hanfei and Zhang Li wrote in an e-mail Thursday. “In a pessimistic scenario, if there is no new growth point or new demand coming up, industrial expansion will probably fall below 5 percent, and this could last longer than a year.”

The benchmark 10-year yield fell three basis points to 3.07 percent as of 4:30 p.m. in Shanghai, National Interbank Funding Center prices show. It dropped to 2.98 percent last month, the lowest since 2009, and is down 55 basis points this year, according to ChinaBond data.

The yield premium investors demand to hold five-year AA- corporate bonds, considered junk in China, over sovereign debt narrowed to 176 basis points earlier this month, the smallest gap in at least five years and prompting concern the market is overheating. The difference has since climbed to 203.

There are still underpriced parts of the market that offer value, and in that sense, even if there is a bubble, it isn’t serious, said the Guotai Junan analysts.

China’s bonds are “reasonably priced” at current yields, as more monetary easing in 2016 can be expected, analysts Andre de Silva and Pin Ru Tan at HSBC Holdings Plc wrote in a report on Thursday. The seven-day interbank repurchase rate, the benchmark money rate, may fall to 1.75 percent next year, they said. It was last at 2.32 percent.

— With assistance by Helen Sun

Before it's here, it's on the Bloomberg Terminal.