Gain for bonds as policy sets to loosen

China's government bonds gained yesterday on speculation that the central bank will ease monetary policy, supporting demand for debt sold to fund a 4-trillion-yuan (US$586 billion) stimulus plan. The local currency was little changed.

The People's Bank of China may increase money supply and cut interest rates to bolster expansion, Governor Zhou Xiaochuan said on Sunday.

The State Council announced the stimulus measures on Sunday and said "moderately loose" monetary policy will be pursued. The central bank since October 27 reduced sales of three-month and one-year bills to every other week, from a weekly basis, to bolster liquidity in the market, said Bloomberg News.

"There is still strong demand for debt investment in the market," said Xu Xiaoqing, a Beijing-based fixed-income analyst at China International Capital Corp, the nation's first Sino-foreign investment bank. "More government bond supply will be offset by the shrinking amount of the central bank bills."

The yield on the 3.68 percent bond due September 2018 slid 2.5 basis points to 2.93 percent by 1:27pm in Shanghai, the lowest this year, according to the China Interbank Bond Market. The price of the security rose 0.22 per 100 yuan face amount to 106.38. A basis point is 0.01 percentage point.

A new, looser monetary policy suggests "that money supply will increase, liquidity will be ample, or interest rates on bank loans will be lower," Zhou told reporters in Sao Paulo, where he's attending a Bank for International Settlements meeting.

China's local-currency bonds advanced 2.7 percent last month, the biggest increase since February 2002, according to a debt index compiled by HSBC Holdings Plc. The People's Bank of China reduced its benchmark lending rate in September for the first time in six years and followed up with two more cuts to both lending and deposit rates in October.

The yuan was little changed against the dollar amid concern the stimulus package will fail to avert a slump in growth as nations enter a recession.

"It's still a big question mark whether the stimulus plan can effectively stop the slowdown," said Liu Dongliang, a Shenzhen foreign-exchange analyst at China Merchants Bank Co. "The government is determined to keep the yuan stable in this turmoil."