While COVID remains well under control in mainland China, we have seen a surge in credit defaults there since the beginning of Q4. So far this quarter, we have seen four major bond defaults in China:
With credit quality in selected sectors worsening, interbank liquidity is going tighter regardless of less supply of government bonds in this quarter (chart 1) than the previous one. In interbank market, 1-month and 3-month repo are back at 3.00% and 3.20% respectively, the upper-end of their trading ranges since the middle of 2019 (chart 2). That means regardless of the counter-pandemic monetary easing across the globe since some 9 months ago, financing costs in mainland China, as represented by interbank repo rates, some how are back at their pre-pandemic levels.
This development obviously is not good for the onshore bond market. In recent weeks, we have seen continued bear-flattening of the onshore yield curve, with 2-year vs 10-year CGB yield spread setting year-tight 27bp, just shy of the 15-month tight 24bp set in 2019 summer (chart 3).
Taking a look at 10-year CGB yield, we, as a bond bear, note that its yield reached year-high 3.36% in the week ending 20 November, very close to our target 3.44% which we have repeatedly mentioned since 16 October (chart 4).
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