China's Bonds Signal Recovery

SHANGHAI -- China's bond market is signaling it expects an economic recovery, aided by the government's debt-funded stimulus package, but deficit spending is a concern. As a result, longer-term yields might not fully track the downward trend in short-term yields, market forecasters said. Analysts expect China's Ministry of Finance to issue record amounts of domestic debt this year to fund public-works programs designed to keep the world's fastest-expanding major economy from cooling too quickly along with the global economy. Economic growth slowed to a five-year low of 9% in the third quarter. On Dec. 19, government officials informed selected bond-market participants, including bank underwriters, that the Ministry of Finance could issue as much as 1.6 trillion yuan, or about $234.5 billion, in bonds this year, a person familiar with the presentation said. That amount would be nearly double the estimated 855.8 billion yuan raised through treasury bonds domestically in 2008. Although 2007 bond issuance was technically higher, almost 70% of that year's 2.24 trillion-yuan bond program was related to the establishment of China's sovereign-wealth fund. China's bond market is tightly regulated and largely closed to foreign investors. But bonds issued domestically are critical to Beijing's budgetary process. In late November, Beijing pledged to commit four trillion yuan to support growth until 2010, prompting expectations that the effort would be financed in the bond market. Finding buyers for the additional bonds isn't expected to be a problem: About $6.85 trillion in deposits sits in bank coffers. Bond yields have tumbled as the country's central bank cut interest rates five times in recent months and implemented other easing moves. Investors expect more interest-rate cuts this year, as inflation also has fallen, to a two-year low of 2.4% in November from a peak of 8.5% in April. The yield on Ministry of Finance 10-year treasurys ended 2008 trading at 2.72%, down from the 4% level where it stood for much of the year. The one-year yield of 1.11% was down from around 3% for much of the year. The one-year yield could fall below 1% in coming months, analysts said.