Chinese Bond Funds Implement Restrictions Amid Declining Yields and Economic Concerns

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In recent weeks, several Chinese bond funds have implemented measures to restrict or reduce the number of new public subscriptions they accept. This move aims to curb inflows into China’s massive 100 trillion yuan (US$14.3 trillion) debt market, as rapidly declining yields make investment allocations increasingly difficult amidst an impending asset famine. Approximately 60 bond funds have already issued statements this month, limiting the size of daily subscriptions, according to data from China Securities Journal.

Bank of Communications Schroder Fund Management, for instance, announced that its Fengrui fund would cap daily unit purchases at 1 million yuan to safeguard the interests of fund holders. Similarly, China Life AMP Asset Management, which manages a fund primarily invested in government bonds, declared last week that it would no longer accept subscriptions from individual investors.

This development underscores the mounting challenges faced by China’s fund managers as the country’s economic recovery loses momentum. In recent months, stock markets have experienced meandering movements, and the yuan has weakened against the US dollar, falling below the 7 yuan per dollar threshold for the first time in five months. Furthermore, a significant drop in bond yields over the past two months has led brokerages such as Guotai Junan Securities and Soochow Securities to suggest that the current trend has largely priced in favorable conditions.

Li Yong, an analyst at Soochow Securities in Beijing, highlighted the limited potential for further yield declines due to weak macro fundamentals and the absence of expectations for near-term interest-rate cuts. He recommended a cautious stance on bonds, emphasizing the need for a careful approach given the circumstances.

The yield on China’s 10-year government bonds experienced a collective decline of 13.7 basis points in March and April as investors sought safer assets amid concerns about the country’s economic growth. This month, the yield has fallen by an additional 4.6 basis points to reach 2.729 percent, approaching a six-month low. Meanwhile, the yield on one-year sovereign bonds traded at 2.066 percent, down by 22 basis points since the end of February.

Despite economic data falling short of economists’ expectations in April, the People’s Bank of China (PBOC) has refrained from implementing extensive measures. Wary of capital outflows and asset bubbles, the central bank has opted to keep the borrowing cost of the medium-term lending facility, a funding tool for commercial lenders, unchanged this week. The PBOC’s cautious approach aligns with its commitment to maintaining stability and avoiding excessive risk.

This scenario draws parallels with the “asset famine” experienced in 2016 when funds flowed into bonds and high-dividend equities, resulting in declining yields across all asset classes following a previous stock market meltdown.

Sinolink Securities advises investors to overweight short-dated bonds with clearer outlooks, while suggesting that long-dated debt would require additional catalysts such as increased fiscal policy support and interest rate reductions.

Jin Qianjing, an analyst at Shenwan Hongyuan Group in Shanghai, believes that government bond yields will remain rangebound until a clear direction for economic recovery emerges. With a mild economic recovery backdrop, monetary policy tends to remain neutral.

In conclusion, Chinese bond funds are taking precautionary measures to limit new subscriptions as declining yields pose challenges amidst an economic slowdown. As investors navigate this uncertain environment, focusing on short-dated bonds with clearer outlooks and monitoring potential catalysts for long-dated debt will be crucial. The People’s Bank of China’s cautious stance on monetary policy reflects its commitment to maintaining stability and managing risk.