CNY rates remain largely anchored, with 10Y CGB yields easing from 1.82% last week to 1.79%, while the 2Y yield edges down marginally from 1.32% to 1.31%. Couple developments are driving the extended curve flattening.
First, front-end yields are sticky as PPI has returned to positive territory at 0.5% in March after 41 months of contraction. This prompts investors to reassess the likelihood of near-term easing by the PBOC. Second, weak credit demand continues to weigh on long-end yields. Growth of Total Social Financing (TSF) outstanding has decelerated to 7.9% YoY from 8.2% in February, while that of government bond financing has declined to 15.9% from a peak of 21.9% in mid-2025. With policymakers maintaining a broadly unchanged fiscal stance, government bond issuance growth is set to moderate. Meanwhile, medium- to long-term corporate loans have contracted by 9% YoY, reflecting subdued investment sentiment amid the ongoing US-Iran conflict. Household credit demand remains soft, suggesting that prospective homebuyers are staying on the sidelines.
That said, cost-push inflation concerns appear somewhat overstated. China’s March CPI and PPI prints remain relatively contained compared with other major economies. A diversified energy mix continues to cushion cost pressures, with renewables and nuclear accounting for a larger share of energy consumption than oil. This relative resilience in energy supply should help support export performance. March’s weak trade data should be interpreted with caution, as base effects are distorting the signal. A late Lunar New Year in 2026 has delayed the resumption of factory activity into March, while March 2025 exports were exceptionally strong due to front-loading ahead of US Liberation Day in April. Indeed, high-frequency data such as port throughput (excluding oil and gas carriers) remains broadly stable at around 60mn tonnes per day into April, suggesting underlying trade momentum has not materially deteriorated.
From a monetary policy perspective, RMB strength is providing additional room for easing alongside still weak inflation. The CNY has appreciated to around 6.82 against the USD, its strongest level since February 2023. There will be ongoing liquidity support via open market operations and bond purchases. Front-end rates should therefore stay anchored. Taken together, we see scope for a re-steepening bias in the curve.
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