The People’s Bank of China headquarters (right) is seen in Beijing. The PBoC will probably lower its one-year deposit rate again in the January-March period, according to economists surveyed by Bloomberg.



China’s bonds delivered the best returns last year since 2008 and further gains are forecast for the coming quarter as policy makers keep borrowing costs down to revive growth in the world’s second-largest economy.

A gauge of the securities gained 12%, more than in the previous five years combined, Bank of America Merrill Lynch data show. The yield on 10-year sovereign notes is expected to drop for a record fifth quarter in the period through March 31, based on the median of seven estimates in a Bloomberg survey.

The People’s Bank of China (PBoC) lowered benchmark interest rates for the first time in two years in November and has been injecting cash to selected lenders to encourage spending and investment. Gross domestic product will probably increase 7.4% in 2014, the slowest growth since 1990, and expansion is seen cooling to 7% in 2015, a separate survey shows. Manufacturing contracted in December for the first time in seven months, a Purchasing Managers’ Index indicated.

“There’s not much chance of the growth rate picking up substantially,” Cao Yang, an analyst at Shanghai Pudong Development Bank Co, said in a phone interview. “The PBoC will continue to work on lowering borrowing costs, and keep monetary policy relatively loose, so I’m optimistic about the bond market.”

The central bank will probably lower its one-year deposit rate again in the January-March period, according to 10 of 17 economists surveyed by Bloomberg in December. The benchmark was reduced to 2.75% from 3% on November 21, while the one-year lending rate was cut to 5.60% from 6%.

The PBoC also pumped 769.5bn yuan ($126bn) into selected banks in September and October via its medium-term standing lending facility. At least some of the three-month loans granted in September were rolled over, a government official familiar with the matter said December 17.

China’s 10-year sovereign bond yield fell as much as 108 basis points this year to 3.48% on Nov. 24, the lowest since June 2013, and was 3.62% yesterday, ChinaBond data show. It is forecast to drop to 3.4% by March 31, a Bloomberg survey shows. The two-year yield is seen sliding to 3% from 3.3%, based on a separate poll.

“The PBoC’s continuous guidance to lower nominal and real interest rates is a precondition for an improvement in growth,” analysts led by Chen Jianheng at China International Capital Corp wrote in a note. “To put it another way, a stimulus without benefiting the bond market is destined to fail.”

The yuan fell 2.4% last year to 6.2040 per dollar in Shanghai, the first annual loss in five years, as the economy slowed. Industrial profits declined 4.2% last month from a year earlier, the biggest drop since 2012, official data showed. Foreign investors’ holdings of onshore bonds surged 59% in the first nine months of this year to 634bn yuan. That compared with an increase of 34% in stock ownership to 462bn yuan, PBoC data showed.

Overseas institutions held 215.7bn yuan of sovereign bonds and 224.36bn yuan of notes issued by three policy lenders, including China Development Bank Corp, Agricultural Development Bank of China and Export-Import Bank of China at the end of November, data from China Central Depository & Clearing Co show.

“Global investors are likely to continue allocating more into China’s bond market, which would be another bullish factor,” said Wang Ming, chief operations officer at Shanghai Yaozhi Asset Management, which oversees 2bn yuan of fixed-income investments. “The bull-run may not be as strong as in 2014, but there’s no doubt about a slowdown, and that’ll be the most supportive factor for the bond market.”





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