RPT-BREAKINGVIEWS-China can let new bond binge play out – for now

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Chan Ka Sing

HONG KONG, Dec 4 (Reuters Breakingviews) - The People’s Bank of China has spent much of 2024 locking horns with bond bulls. Yet when treasury yields dipped to record lows this week, officials stayed quiet. That's in part because there's less concern about rampant speculation, but also because the insatiable appetite for sovereign debt fits nicely with Beijing’s plan to sell more of it. That resets the bar for intervention.

A dire economic outlook in the first half of the year helped fuel the bond rally. The yuan was testing its one-year low against the dollar while the benchmark CSI300 stock index .CSI300 dipped to a five-year nadir. Investors flocked to safe havens. But whenever the 10-year yield CN240011= dived towards 2%, the central bank would cry foul. It warned that smaller banks' rising sovereign bond holdings were creating excessive risk, and even went as far as short-selling long-term government bonds to try to push yields up.

The intervention did not cool the bond rally, though. Beijing’s stimulus package did. After the PBOC started implementing it in late September, yields rebounded and the CSI300 surged more than 30% within a month. Yet as reality sank in about how little the measures could meaningfully boost growth, capital started to find its way back to bonds from stocks. In the past two months, the yield on the 10-year benchmark dipped 20 basis points, hitting a record low this week.

There's less official fuss, though, because some key issues have changed. First, the bond funds and banks doing much of the buying now appear to be long-term bondholders, not speculators.

More importantly, low yields work in Beijing's favour. Citing sources, Caixin Global reported the government is planning to raise at least 2 trillion yuan in each of the next three years to finance its stimulus measures. The lower the bond bulls drive yields, the less it will have to pay in interest on the new debt.

It's a tricky balancing act, though. Regulators are expected to meet later this month at the Central Economic Work Conference to map out plans for 2025. Investors will be looking for measures that support the stock and property markets as well as faster economic growth.

If those don't materialise, they're likely to flock to the bond market as a safe haven. CITIC Securities 600030.SS is already projecting the benchmark yield to drop to as low as 1.6% next year. If investors' economic doom-and-gloom scenarios are the driving force, Beijing is likely to intervene once again.

CONTEXT NEWS

The yield on China's benchmark 10-year government bond dropped below 2% on Dec. 2 to hit its lowest point since records began in 2002. Using data from China Central Depository & Clearing, Reuters reported it's only one of a handful of times that the yield has been below 2%.

(Editing by Antony Currie and Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on CHAN/ KaSing.Chan@thomsonreuters.com))