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China bond investor who predicted sell-off now sees recovery

Hong Kong

ALL the action in China's markets is now in government bonds, where a sudden sell-off this month contrasts with subdued moves elsewhere. One contrarian says it won't last.

The yield on benchmark 10-year sovereign debt is up 20 basis points since a three-year low on Sept 6, ranking it among the worst performers in Asia. Meanwhile, stocks have turned the least volatile since early 2018, while the previously wild yuan has traded around 7.08 per dollar for almost two weeks.

While many analysts and investors were blindsided by China's bond rout, BNP Paribas Asset Management's Jean-Charles Sambor had cautioned against buying onshore notes in August. He's now more positive on yuan-denominated debt, saying the price is attractive, and predicts the 10-year yield will revert to 3.1 per cent by the end of the year.

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Worsening economic data is strengthening the bull case for bonds, he says, as Beijing may adopt easier monetary policy. "A turning point should be here pretty soon," said Mr Sambor, BNP Asset's deputy head of emerging market debt in London. "We see value in policy banks and will continue to buy in the adjustment." Rising yields are a natural consequence of returning risk appetite globally this month after trade tensions eased between Washington and Beijing. But in China, the rout was made worse by faster-than-expected inflation and whispers that authorities may limit the sale of bond funds. Concerns over liquidity and a prudent central bank have also added to the pessimism.

While China funnelled 200 billion yuan (S$38.6 billion) of one-year cash into the banking system last week, they've stayed clear of more aggressive measures this year. The central bank has injected a net 560 billion yuan through open market operations in the past four days, ahead of a deadline on Thursday for corporate tax payments.

The risk is that accelerating inflation may undermine a recovery for bonds - Beijing won't want to inflate prices further by injecting more liquidity. China's consumer price index will hit 3.5 per cent by December as a deadly swine fever sends pork prices soaring, according to Bloomberg Economics. Inflation was at 3 per cent last month, the fastest increase in prices since 2013. China's pork crisis risks sending inflation to 4 per cent by next year.

Still, others echo Mr Sambor's bullish call on Chinese bonds. Wilfred Wee, a money manager at Investec Asset Management, considers the notes "a core holding". Sun Lu, a strategist at Citigroup Inc, reiterated her "overweight" recommendation and says a likely lower supply of sovereign notes this quarter will support the debt. China bonds will become more mainstream as some enter JPMorgan Chase & Co's flagship indexes next year, Singapore-based Mr Wee said. That's going to help support the asset class as more foreigners buy Chinese debt, he said. BLOOMBERG