China money rates slide, bond yields rise with further easing expected

SHANGHAI: China's money rates slid this week and yields on lower rated bonds rose as investors factored in growing expectations that the central bank will ease monetary policy further.

The weighted average benchmark seven-day repo contract lost nearly 7 basis points from last week's close to 3.41 percent, while the 14-day tenor dropped 12 points.

The spread between yields on AAA and AA rated corporate bonds rose as markets priced more risk into lower-quality issuers.

Surveys published this week showing factory activity weakening added to worries over how long the slowdown in China's economic growth would last, leading to some predictions that the People's Bank of China (PBOC) will have to ease policy further having cut interest rates two weeks ago.

"We see little improvement in activity indicators in November," ANZ economists wrote in a research note, predicting that the PBOC will add more liquidity and encourage banks to lend more in response.

"In addition, seasonal pattern suggests that China's fiscal spending usually surges at the end of the year, which will not only improve the inter-bank market liquidity conditions, but

also somewhat lift up the demand for manufacturing goods."

Credit indicators were mixed.

Benchmark bond yields have declined.

And the prime lending rate, a survey-based indicator of one year loan rates from contributing banks, has fallen sharply in recent weeks to 5.51 percent.

But the Shanghai Interbank Offered Rate (SHIBOR) has risen sharply since mid November.