Is China’s Deleveraging Campaign Behind Bond Market Dive?


Domestic analysts say that China’s deleveraging campaign is a driving factor behind recent panic selling on the bond market that took the yield for 10-year sovereign debt to a three year peak.

The yield on Chinese ten-year sovereign bonds breached the 4 percent threshold for the first time in three years on Tuesday, as mass selling in the wake of disappointing economic data for October puts downward pressure on prices.

While the release of economic data that fell short of consensus expectations is the initial culprit for China’s bond market drop, some analysts say that the constrained capital conditions created by Beijing’s ongoing deleveraging campaign have also played a pivotal role.

“Scarcity of money was a chief factor behind the excessive drop, amplifying the impact of economic expectations upon market mood,” said┬áCITIC Securities fixed income analyst Ming Ming said to China Securities Journal.

“Since the start of November the central bank’s open market operations have been neutral in general, but despite┬áthe large-scale net injection over the past two days, funds have remained tight because of tax revenues and debt repayments.

Ming notes that while overall credit growth held steady in October, deposit growth continued to fall beneath formerly sanguine expectations.

According to Ming concerns over Beijing’s future plans for regulation of the Chinese finance sector and deleveraging are also contributing bond market volatility, alongside overseas factors such as a rise in international oil prices that are exacerbating inflation expectations.

“Current investor concerns in relation to regulatory policy are extremely pronounced,” said Ming.

“Although there is a certain level of consensus on the market with respect to regulation, prior to implementation there is a certain level of divergence with respect to the pace and extent of regulatory strengthening, and the market mood remains nervous and pessimistic.

“Regulatory policy won’t come all at once, and expectations could further intensify, creating a market environment where ‘no news is bad news.'”