China Bond Investors See Record Long Bull Run Ending by Mid-2016

  • Stabilizing growth seen as biggest risk to rally in survey
  • Equities to outperform bonds, predict 21 of 22 forecasters

Chinese investors are predicting a record-long rally in bonds will end before mid-2016 and debt securities will trail behind stocks as the economy stabilizes.

Fifteen of 22 fixed-income traders and analysts surveyed by Bloomberg last week said the rally of eight consecutive quarters will end before June 30 and all but one predicted equities will outperform next year. An improvement in the economy was singled out as the most likely negative factor to the market.

“We’re bearish on bonds and bullish on equities,” said Deng Haiqing, chief economist at JZ Securities Co. “The worst for the Chinese economy is behind us, and as November data show signs of improvement, a rebound in growth is probable in 2016.”

The People’s Bank of China has cut benchmark interest rates six times since last year to the lowest ever, driving a record number of consecutive quarterly gains for Bank of America Merrill Lynch’s broad China bond index. Economic indicators for November including factory production and financing activity showed early signs of growth stabilization as the authorities stepped up fiscal stimulus.

A broad China bond market index compiled by Bank of America Merrill Lynch climbed 8.9 percent this year, after increasing 11 percent in 2014. That compares with a 9 percent advance in the Shanghai Composite Index of stocks in 2015 -- which included an early rally, a June collapse and a gradual rebound -- after a surge of 53 percent last year.

Credit Events

A slowdown in the economy has affected companies’ cash flows, with Shengda Group Ltd. becoming at least the seventh Chinese firm to renege on local debt obligations this year. All the 22 people polled said defaults will increase further in 2016, and 16 respondents predicted credit premiums will widen. The extra yield of five-year AA rated corporate notes over the sovereign climbed to 173 basis points on Monday, after touching an eight-year low of 169 basis points last month.

China’s gross domestic product is forecast to grow 6.9 percent this year, the slowest pace in a quarter century. Policy makers pledged to continue efforts to shore up expansion in the annual Central Economic Conference this month. Monetary policy must be more “flexible” and fiscal policy more “forceful” as leaders create “appropriate monetary conditions for structural reforms,” according to statements released at the end of the government’s Central Economic Work Conference by the official Xinhua News Agency.

That followed similar comments in the PBOC’s third-quarter monetary policy report, which said that while policies need to prevent an excessive drop of aggregate demand, they should avoid pumping too much liquidity into the market, which could worsen structural imbalances.

Restructuring Push

“As China is facing destocking, capacity cuts and restructuring reforms, monetary policy may not be as loose as this year in 2016,” said Liu Changjiang, a bond analyst at Soochow Securities Co. “Policy makers will become more cautious in loosening, as otherwise it may be difficult to carry out the reforms.”

The PBOC will lower the benchmark one-year lending rate 50 basis points by the end of next year from 4.35 percent currently, according to a separate survey conducted Dec. 17-22. That compares with a cut of 125 basis points in the rate since November 2014. The overnight repurchase rate rose to 1.92 percent on Monday, its highest level since Sept. 30.

The yield on the benchmark 10-year sovereign note is likely to be in a range between 2.6 percent and 3.1 percent next year, according to the survey, after touching 2.80 percent Monday, the lowest since January 2009, ChinaBond data show.

“The first half of next year will continue to feature ample liquidity,” said Liu. “But there could be a turnaround in the second half, affecting the whole year’s bond-market performance.”

— With assistance by Laura Yin, Xize Kang, and Helen Sun

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