Chinese bonds see no haven demand from stock losses on PBOC bets
The central bank’s reluctance to ease its policy further remains the core issue weighing on the debt market
[BEIJING] China’s stock and bond markets are decoupling, breaking the inverse correlation where debt traditionally rises when equities fall, as bets on monetary easing take a backseat.
For the first time since 2022, Chinese onshore stocks and government debt are moving independently, losing their inverse relationship, according to data compiled by Bloomberg. China’s 10-year bond futures have been largely unchanged in November despite a 2 per cent drop in the Shanghai Composite Index this month, further backing this trend.
Investors are avoiding bonds as they see the People’s Bank of China (PBOC) shying away from monetary easing while Beijing leans on fiscal policy, which would pose headwinds for the debt market. The development bodes ill for Chinese sovereign bonds that are set for their worst year since 2017 after an improvement in US-China relations drove investors away from haven assets.
“The possibility of PBOC delivering a policy rate cut within the year is very low, which limits yield downside and suppresses demand for bonds,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. “Even if the stock market is going through an adjustment, bond market sentiment is not getting a boost.”
The usual inverse relationship between stocks and bonds became extreme earlier this year. When stock prices rose sharply, investors pulled their money out of the bond market, causing a panic selling of debt.
However, the recent losses in Chinese shares spurred by a sell-off in artificial intelligence shares in the US have failed to drive investors back to the bond market.
Citic Securities offers one possible explanation for this. Declines in stocks may have prompted some mixed-asset funds to sell bonds to meet redemption demand from clients, analysts led by Ming Ming wrote in a note.
Ultimately, the PBOC’s reluctance to ease its policy further remains the core issue weighing on the debt market.
China’s central bank downplayed concerns over a slowdown in new loans and pledged to adopt “cross-cyclical” policy adjustments in its recent quarterly report, prompting traders to dial back hopes for monetary easing in the near term. Even though the PBOC resumed government bond purchases last month, it kept the scale modest, further signalling a cautious approach to easing.
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Bond market volumes have shrunk since the PBOC announced a small purchase of government bonds, Lv Pin, an analyst at Zhongtai Securities, wrote in a note. Trading Chinese bonds is likely to remain difficult in December, he said. BLOOMBERG
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