(Bloomberg) -- China’s bond traders are watching a key legislative meeting this week where lawmakers are expected to approve a fiscal package worth trillions of yuan.
An increase in bond sales to prop up economic growth is expected, but the question is just how large the new stimulus will be. A surge in issuance may weigh on China’s debt market, and two trillion yuan ($280 billion) has become a key figure to watch.
China’s central and local governments have sold an average of about 1.8 trillion yuan of notes per month from January to October, according to Bloomberg calculations. After accounting for 1.1 trillion yuan already in the pipeline for the rest of the year, the market is ready for about 2.5 trillion yuan of additional debt sales for November and December. Anything above that is likely to stir volatility.
Optimism is growing that authorities may announce stronger stimulus measures after the meeting of the National People’s Congress Standing Committee, the executive body of the nation’s top legislature, concludes on Friday. That would help cushion any blow from potential tariffs threatened by President-elect Donald Trump.
Societe Generale SA is forecasting about two trillion yuan of new supply for the rest of 2024 and 2025. Oversea-Chinese Banking Corp. expects the same amount of additional bond sales for the next 12 months, while ANZ Bank expects lower additional net debt sales of about 1.5 trillion yuan for the remainder of 2024.
“The market will need to see more than three trillion yuan to see a selloff,” said Kiyong Seong, lead Asia macro strategist at Societe Generale in Hong Kong. Given the uncertainty around US policy changes, he isn’t expecting the stimulus to be bumped up immediately.
A surge in debt issuance may trigger volatility, as greater supply might shock the market. That’s especially the case after non-bank liquidity tightened when investors rushed into stocks during a surge in late September as the government announced some of its stimulus plans.
China’s sovereign bonds have been trading in a tight range since late September, after retreating from the highest level in about two decades after the stimulus blitz unleashed in late September. The 10-year yield has hovered between 2.1% and 2.2% over the past month.
New debt issuance may help lift long-term yields gradually, according to Frances Cheung, head of foreign-exchange and rates strategy at Oversea-Chinese Banking. The country’s current monetary and fiscal policy supports a steepening bias in the government bond curve, she said.
“Should any number from the NPC surprise to the upside, it shall add to this momentum,” she said.
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