China Asks Banks to Report on Liquidity After Bond Slump
Comment of the Day

November 17 2022

Commentary by Eoin Treacy

China Asks Banks to Report on Liquidity After Bond Slump

This article from Bloomberg may be of interest to subscribers. Here is a section:

Bank of China said it would contain losses and actively pursue relatively secure investments. Industrial Bank Co. and China Zheshang Bank Co. also sent similar posts on their official WeChat accounts, encouraging investors to “buy at lows” and position for longer-term return after the sharp losses in bond market.

The PBOC injected a net 123 billion yuan ($17.3 billion) of seven-day liquidity via its open-market operations on Wednesday. The central bank said in a statement earlier this week that injections topped 1 trillion yuan this month, through a combination of short-, medium- and long-term policy tools. 

The yield on China’s one-year government bond was little changed at 2.17% on Thursday, ending a seven-day climb that took it to highest since January. The yield on the 10-year note fell 3 basis point to 2.80%, after jumping 10 basis points earlier this week in its worst drop since 2016. The CSI 300 Index of stocks fell 0.4%.

Banks’ wealth management products have drawn increased scrutiny from regulators in past few years, amid concern about a host of risks from implicit guarantees and leverage, to duration mismatches and a lack of transparency around where the money is invested.

Eoin Treacy's view

There is nothing quite like the government telling investors to buy the dip to initiate a wave of buying. The fact that the bond market is seeing outflows because retail investors are so eager to buy stocks suggests the message has been received. It’s OK to speculate in the markets again.
Historically, the times when the government gives the green light to speculation have been the most rewarding for Chinese investors. The fact Alibaba reversed an early decline, on mixed results, to finish up 7% is a testament to enthusiasm that the worst is over for the Chinese economy even as the number of COVID cases continues to march higher.
The Hang Seng China Enterprises Index (H-shares) Index continues to extend its rebound as it unwinds the oversold condition relative to the 200-day MA.
The newly listed Premia China USD Property Bond ETF offers a convenient way to monitor the performance of the 1-5yr maturity senior bond basket. It bounced over the last two weeks but has not yet broken the downtrend.

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