Peoples Bank of China Bonds Fall on Higher Reserve Ratio

peoples-bank-of-china-bonds-fall-on-higher-reserve-ratioBloomberg BusinessWeek – China’s government bonds fell after the central bank announced this year’s third increase to bank reserve ratios over the weekend.

The People’s Bank of China today sold one-year bills at a yield of 1.9264 percent, unchanged for a 14th sale in a row, according to traders at Industrial Bank Co. and Industrial & Commercial Bank of China Ltd. Yuan forwards were little changed as the head of the American Chamber of Commerce in China said the country may allow its currency to appreciate against the dollar in the second half.

“The unexpected increase in the reserve requirement ratio, which is targeting hot money inflows, has a negative impact on the bond market,” said Guo Caomin, a bond analyst at Industrial Bank Co. in Shanghai. “But yield gains are limited because the central bank may not resume pushing up bill yields or raise interest rates in the short term.”

The yield on the 3.43 percent note due February 2020 climbed three basis points to 3.35 percent as of 10:49 a.m. in Beijing, and the price of the security dropped 0.21 per 100 yuan face amount to 100.66, according to the China Interbank Bond Market. A basis point is 0.01 percentage point. Yesterday was a public holiday in China.

The reserve ratio requirement will increase 50 basis points effective May 10, the People’s Bank of China said on its website on May 2. The current level is 16.5 percent for the biggest banks and 14.5 percent for smaller ones. Within an hour of the announcement, Finance Minister Xie Xuren said that officials remained committed to expansionary policies to cement a recovery.

China will use its policy tools flexibly to deal with growth and inflation, Vice Finance Minister Li Yong said in Tashkent, Uzbekistan, yesterday at the annual meeting of the Asian Development Bank. China’s economic growth in the first quarter indicates the government may need to act, while the nation’s economic recovery is largely due to stimulus and non- state companies have failed to spur growth, he said.

Forwards Little Changed

Twelve-month non-deliverable forwards traded at 6.6148 per dollar, compared with 6.615 yesterday, according to data compiled by Bloomberg. The contracts reflect bets the currency will strengthen 3.2 percent from the spot rate of 6.824. Yuan forwards reached 6.5930 on April 22, the strongest level since Jan. 11.

A higher value for the currency, also referred to as the renminbi, would ease inflationary pressures in China and serve the economic interests of Chinese consumers and importers of raw materials, Christian Murck, president of Beijing-based AmCham in China, said in an interview yesterday in Washington.