Chinese bond rally fades as PBOC easing cycle nears an end

The People's Bank of China (PBOC) is expected to stop pursuing easing monetary policy as inflation concerns have risen significantly. For this reason, expectations of bulls counting on China's bond growth due to the easing policy are likely to fail.

On Wednesday, the yield on the most popular bonds (bonds with maturity of 10 years) fell to 2.75%. This happened against the background of China's announcement that it plans to use monetary instruments to maintain liquidity.  However, on Thursday the volume of Chinese government debt began to decline and the yield on bonds with 10-year maturity totaled 2.8%, thus increasing by 4 basis points.

It’s reported that the PBOC has extended the repayment terms only for that part of the loans, which have to be repaid in November. Such a decision was made, since, according to the bank, current liquidity can be described as sufficient. Moreover, the bank noted the presence of inflation risks. All these factors create additional danger for bulls, interested in the growth of bonds.

Tommy Xie, head of Greater China research at Oversea-Chinese Banking Corp. says China's current monetary policy is about to end, as the economy is expected to recover over the next year. In addition, fear of unintended consequences of the current policy is also one of the reasons for its end.

Qin Han, chief bond analyst at Guotai Junan Securities Co. has a similar view. He believes that the upcoming RRR cut can be the final step under the current policy.