Policies announced at the National People’s Congress (NPC), which ended today, will boost bond issuance in China’s onshore market. Giving a fillip to China’s onshore market may detract from the offshore market, but foreign investors can look forward to further liberalisation in the world’s third largest bond market.
The session of the NPC, China’s parliament, was held in Beijing from March 5 to 15.
“Going forward, we expect solid corporate bond issuance benefiting from the low financial market interest rates,” said JP Morgan in a recent report.
“The most important message from the NPC is a confirmation that there will be more and cheaper credit to support the private sector,” said Gary Ng, Asia Pacific economist at Natixis.
Most of the bond issuance will remain onshore. This is not a huge surprise given the increasingly low yields and Beijing’s lax monetary policy stance.
At an NPC press conference on March 15, Chinese Prime Minister Li Keqiang said that downward policies which face the world’s second-largest economy must be countered by “effective policies”.
“We can use price tools such as reserve requirement ratios and interest rates,” he said.
Morgan Stanley expects further reserve requirement ratio (RRR) cuts this year to support credit growth. If China’s GDP growth continues to slow, Chinese policymakers may cut Open Market Operations rates and use window guidance to reduce bank lending rates, it said in a report.
Li qualified expectations by saying that the government will not engage in massive stimuli like quantitative easing or a huge expansion in public spending.
At the congress, Yi Gang, governor of the People’s Bank of China (PBOC), said there is room to cut RRR, but it is much smaller than previous years.
“Yi’s elaboration may be positive for the bond market, as a lower government bond yield is clearly an important first step for China to achieve a lower real interest rate,” noted OCBC Bank in a report.
Fitch warned that further policy easing could pose risks to China’s sovereign rating both this year and next. A significant acceleration in credit growth could also pressure China’s rating, the ratings agency said.
The increased funding support for companies will cause these firms to tap the onshore bond market to refinance existing debt. This may result in a reduction in net issuance by Chinese companies in the offshore market.
Even if the onshore market expands at the expense of the offshore market, foreign investors will have more opportunities to invest onshore.
At the NPC, Pan Gongsheng, a vice governor of PBOC, said that China will continue to push to open up its bond market to overseas investors, but gave few details.
Last year, foreign holdings of Chinese bonds rose by Rmb600 billion ($89 billion) to Rmb1.8 trillion. This represents slightly over 2% of China’s bond market, according to official Chinese data.
The Chinese government’s work report presented at the beginning of the NPC said it will step up efforts to attract foreign capital by widening market access and further opening the financial sector.
Portfolio inflows into China are likely to reach $150 billion to $225 billion this year, according to recent research from Morgan Stanley.
TAX CUTS AND MORE SPECIAL BONDS
The prime minister announced that value-added tax (VAT) cuts would take effect on April 1 and that social security reductions would come into effect from May 1. During the NPC, the Chinese government announced a fiscal stimulus plan with Rmb700 billion to Rmb800 billion of VAT cuts.
“China’s bond investors have been jittery recently due to concerns about the shift of monetary policy and higher fiscal deficit,” said the OCBC Bank report.
Nevertheless, the higher-than-expected tax cut may not be necessarily bad for bonds, as the projected Rmb2 trillion cut includes both tax cuts, which will boost business, and social contribution reductions. The social contribution shortfall could be financed by the injection of state assets instead of new borrowing, OCBC continued.
The Chinese government has ramped up the quota for special local government bonds by Rmb800 billion to Rmb2.15 trillion in 2019 from Rmb1.35 trillion last year. It is mostly earmarked for infrastructure projects and a special bond is dedicated to funding a specific project.
The planned issuance of more local government special bonds should be welcomed by the market, said Iris Pang, the greater China economist of ING Bank. But investors should be aware that these bonds do not come with local government contingent guarantees.
Pro-growth measures mean that some risks are mitigated, but it also means that the economy needs a big cushion to support growth, Pang added. “This gives a mixed signal to the onshore and offshore bond market.”
