SHANGHAI: China's government bonds extended gains on Friday, with 10-year yields touching the lowest in nearly four years, on rising expectations of more stimulus to aid the country's recovery.
China's sputtering recovery from the pandemic and signs of deflationary pressure have called for more monetary easing. And major commercial banks' recent decision to lower deposit rates have paved the way for further reductions to policy rates.
Yields on the benchmark 10-year government bond fell to 2.525%, the lowest since April 2020.
Yields have an inverse relation with bond prices.
"The People's Bank of China (PBOC) may start to shift its focus from FX stability more towards monetary easing," said Jingyang Chen, Asian FX strategist at HSBC, expecting a rate cut in China would come after the U.S. Federal Reserve kicks off easing.
The Fed's historic monetary tightening had widened yield differentials with China over the past two years, piling downside pressure on the Chinese currency and limited the scope of easing in the world's second-largest economy.
With the Fed now indicating a dovish pivot and markets expecting the U.S. central bank to cut rates soon, the yuan has pared much of its loss from a 16-year trough hit in September, giving policymakers some leeway to cut rates, market watchers said.
"In light of the latest news on large banks lowering deposit rates and the more dovish Fed, we expect the PBOC to cut policy rates in Q1 and Q3 this year by 10 basis points (bp) each, and to cut reserve requirement ratio (RRR) in Q2 and Q4 this year by 25 bp each," analysts at Goldman Sachs said in a note.
Others, including Citi, however, expect the easing to come "as early as in coming weeks, within this month."
Citi analysts expect a total of 20 basis points in rate cuts and 50 basis points of reductions to banks' RRR in 2024.
China is set to roll over 779 billion yuan ($108.70 billion) worth of medium-term policy loans due this month on Jan. 15, and may lower rates at a monthly LPR fixing on Jan. 22. ($1 = 7.1664 Chinese yuan) - Reuters
