(Bloomberg) -- Without a policy announcement, China's central bank has effectively tightened monetary conditions in recent weeks, an analysis of its transactions shows.
The People's Bank of China has cut back on seven-day open-market operations and is instead injecting more funds through 14-day and 28-day contracts. That's had the effect of raising short-term borrowing costs and pressing up bond yields. It's another sign of selective tightening by the PBOC that's reinforced the views of many economists that China has turned the corner away from monetary stimulus.
With economic growth stable, policy makers are trying to rein in leverage in the world's No. 2 economy. The impact is being felt in the debt market, where the government yield curve has reached the steepest since April and the yield premium on three-year AAA corporate bonds is set for the biggest jump in seven months.
“China's central bank has essentially raised rates by 25 basis points through money market operations,” said Deng Haiqing, chief economist at JZ Securities Co. in Beijing. “The bond market adjustment is only beginning. We expect the yield curve steepening to be the main feature of the market in 2017, driven by mild PBOC tightening.”
PBOC Governor Zhou Xiaochuan has increasingly relied on market rates to guide policy, shifting away from the old benchmarks -- the one-year lending rate and the required reserve ratio for banks. Without the kind of policy announcements of counterparts elsewhere, analysts are stuck divining officials' intentions through market moves. The PBOC didn't immediately respond to a faxed request for comment.
Interbank rates have “basically gone up 20 to 30 basis points,” said Ming Ming, the head of fixed-income research at Citic Securities Co. and an ex-PBOC official.
See here what else the PBOC has done to lift borrowing costs
Bond returns are being hurt by a PBOC effort to squeeze financial-market leverage. While the central bank injects money with seven-day reverse repurchase operations at 2.25 percent, it has started offering 14-day and 28-day contracts at rates as much as 30 basis points higher. The end result is secondary market one-week funding costs of around 2.5 percent.
Liquidity is likely to stay tight through the Lunar New Year at the end of January, before improving, according to Meng Xiangjuan, head of fixed income research at SWS Research Co.
“We don't expect monetary policy to be eased further,” said Jing Lei, Beijing-based chief investment officer of fixed income at Harvest Fund Management Co., which manages 315 billion yuan ($46 billion). “All the regulators are trying to control the leverage in financial markets.”
Harvest is less bullish for 2017 after corporate notes returned 4.1 percent so far this year, down from 11 percent in 2015 and 12 percent in 2014, Bank of Merrill Lynch indexes show. The AAA yield premium widened 15 basis points so far this month to 79.
Stress in the corporate bond market was heightened by two Chinese companies that failed to make payments on local bonds this month, though they made good on the obligations a day late. At least 23 onshore bonds have seen defaults this year, still a small figure but up from just seven in 2015.
Investors have been turning more cautious with leverage in the interbank market falling. Outstanding repurchase agreements reached 8.9 trillion yuan in October, down from a record 9.7 trillion yuan in December, the latest National Interbank Funding Center data show.
China's sovereign yields have risen, along with those of counterparts around the world in reaction to U.S. President-elect Donald Trump's stimulus policies, steepening the yield curve as seen below:
One-Month China Yield Curve Change (Source: ChinaBond)
“You can see a little more steepening of the curve,” said Neeraj Seth, head of Asian credit at BlackRock Inc. in Singapore, which is waiting for buying opportunities in long-end notes.
For his part, Seth sees neither tightening nor loosening from the PBOC going forward. "It will be a neutral monetary policy."
--With assistance from Denise Wee Yinan Zhao Xize Kang Helen Sun and Ling Zeng To contact the reporter on this story: Lianting Tu in Hong Kong at ltu4@bloomberg.net. To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Sandy Hendry, Christopher Anstey
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