We continue to see a strong case for China Government Bonds (CGBs) despite a new round of equity market support measures announced yesterday, with 10Y and 30Y futures continuing to see steady inflows yesterday.
This latest policy support follows sharp pullbacks in October. The CSI 300 and STAR 50 have fallen by 8.5% and 24% respectively, amid AI earnings concerns, weak corporate fundamentals, and margin deleveraging. First, policymakers has launched the third tranche of the Securities, Funds, and Insurance Companies Swap Facility (SFISF) today, exceeding CNY100bn and nearly matching the total prior outstanding of CNY105bn. Participants pledge eligible assets for highly liquid assets like CGBs, raising cash in the repo market to invest in A-shares. Second, the Stock Buyback Relending Program has been upgraded into a permanent facility, with the relending rate cut from 1.25% to 1.00%. However, such stimulus is unlikely to generate significant upward pressure on long-end rates, and equity market reactions are expected to remain muted. This could be repeat of rollout of these two programs in October 2024, when investors sidelined equities after the initial rally to await more concrete fiscal stimulus for the real economy.
Other developments continue to reinforce the appeal of CGBs:
Flight to Quality: CGBs remain the primary safe-haven option amid reported debt default by a local government-owned property developer. Sentiment toward local government bonds and LGFV debt has soured as property strains spread from private developers to government-backed entities. With the local government debt-to-GDP ratio reaching 90% by end-2025 (compared to under 30% for the central government), credit spreads between local government/onshore CNY credits and CGBs have widened.
Macro Weakness: Underlying fundamentals remain subdued. Ongoing property market consolidation continues to weigh on consumption and investment sentiment, while October NBS PMIs returned to contractionary territory, erasing the tentative green shoots seen in September. Even tech-related sub-indices have turned south.
Supportive Monetary Policy Framework: New monetary policy tools and policy rate reforms should help anchor rates and bond markets. The Bond Market NBFI Swap Facility (BNSF) announced last week serves as a backstop during market turbulence. Meanwhile, the earlier-than-expected transition of the primary policy rate from the 7-day to the overnight reverse repo rate—which commenced yesterday at 1.25%, below the previous 1.40% benchmark—helps anchor liquidity conditions. The upshot is that the yield curve should remain well-anchored after initial rally, with more inflow into short-end rates.
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