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The 2Y and 10Y CGB yields have found their footings at 1.43% and 1.65% respectively yesterday. That said, the heightening trade tension will continue to weigh on onshore CNY rates. Overnight, the US administration announced a 145% tariff on all Chinese imports. The sagging external sector will stoke overcapacity and thereby weigh on inflation. The correlation between PPI and exports growth reached 0.71 for 2007-2015. PPI released yesterday extended its contraction from -2.2% YoY in February to -2.5% in March, with CPI registering the second month of contraction in a row. The higher real interest rates call for easing. While we expect 100bps of RRR cut this year, we only see room for a 30bps cut in the 1Y LPR as aggressive cuts will weigh on banks' net interest margin (NIM). Note that the NIM has already fallen to 1.52% as of the end of 2024. The PBOC will lean on other monetary policy tools such as the potential resumption of the government bond buying program. The monetary authority’s claims on government bonds only reached 2% of GDP as of February. This compared to 6% of GDP during the Global Financial Crisis.
Looking ahead, investors are all eyes on the support policies from Beijing. Over the week, a state-owned market player has been injecting capital into ETFs and plan to set up a stabilizing fund. The market is also speculating about an acceleration of ultra-long special sovereign bond issuance pledged during the Two Sessions in March. In our view, this will could only partly offset the pressure on onshore yields.
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