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China Debt Plan Underwhelms Bond Market Betting on More Stimulus

(ChinaBond, Bloomberg)

(Bloomberg) -- China’s bond traders, who had been anticipating a key legislative meeting this week for fresh stimulus measures, seemed underwhelmed by the result.

The benchmark 10-year yield slid to lowest in more than a month before paring declines after authorities announced a 10 trillion yuan ($1.4 trillion) program to refinance local government debt. The funds for the program will be provided through 2028, they said, without giving details on the likely increase in bond issuance it might trigger. 

Concerns lingered that a surge in issuance may weigh on China’s debt market, with two trillion yuan ($280 billion) emerging as a key figure for traders.

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.

The National People’s Congress Standing Committee, the executive body of the nation’s top legislature, concluded Friday. Markets had hoped for more policy support to help cushion any blow from potential tariffs threatened by President-elect Donald Trump.

Societe Generale SA had estimated about two trillion yuan of new supply for the rest of 2024 and 2025. Oversea-Chinese Banking Corp. expected the same amount of additional bond sales for the next 12 months, while ANZ Bank anticipated 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,” Kiyong Seong, lead Asia macro strategist at Societe Generale in Hong Kong, said ahead of Friday’s briefing. Given the uncertainty around US policy changes, Seong said 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.

Although Friday’s briefing fell short of investors’ expectations, markets remain focused on the coming months for possible measures to support the economy. 

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. 

“I don’t expect any major fiscal policy rollout so soon as it will take time, and there is still a possibility for another People’s Bank of China rate cut before year end,” said Lynn Song, Greater China chief economist at ING Bank N.V.

(Updates with details in second paragraph, comment in final)

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