An increasingly popular form of investment by these banks is wealth management products (WMP). Increasingly cautious about the potential risks of WMPs, Chinese authorities began to regulate the sector in 2016.
With GDP growth no longer a major agenda item for the government this year, we expect the deleveraging campaign to exert upward pressure on China’s bond yields over the medium term. Thus we continue to be bearish on China Government Bonds.
ANZ estimates the overall WMP-related leverage in China’s interbank market has eased the middle of 2016. Furthermore, authorities are likely to continue to tighten further as financial deleveraging has become a policy priority in 2017.
Besides regulatory tightening, the People’s Bank of China (PBoC) has also begun to re-price the cost of short-term funding in the money market.
This deleveraging campaign will exert upward pressure on China’s bond yields and we expect the 10-year CGB yield to reach 3.80 per cent by the end of 2017.