China’s bond funds cap inflows after yields decline rapidly amid country’s faltering economic recovery

Rapid drop in bond yields has prompted brokerages such as Guotai Junan Securities and Soochow Securities to say that the run has priced in most tailwinds

Scenario is reminiscent of the ‘asset famine’ in 2016

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The view from the observation deck at Shanghai Tower. ‘Government bond yields will trade in a rangebound pattern until there’s a clear direction for a recovery in the economy,’ an analyst says. Photo: Bloomberg

Published: 2:40pm, 18 May 2023

Some Chinese bond funds have begun halting or lowering the amount of new public subscriptions they accept to limit inflows into the country’s 100 trillion yuan (US$14.3 trillion) debt market, as a quick decline in yields makes allocations more challenging amid a looming asset famine.

About 60 bond funds have issued statements limiting the size of daily subscriptions this month, according to data by China Securities Journal. Among them, Bank of Communications Schroder Fund Management said on Wednesday that its Fengrui fund would cap at 1 million yuan the amount of units investors can buy every day to protect the interests of fund holders. A fund mainly investing in government bonds managed by China Life AMP Asset Management said last week that it would not accept subscriptions from individual investors any more.

This development underscores the mounting challenges China’s fund managers face when it comes to positioning money as China’s economic recovery loses steam. Stocks have been meandering in a narrow range over the past three months and the yuan has weakened to below the level of 7 against the US dollar for the first time in five months this week. A rapid drop in bond yields, which move inversely to prices, over the past two months has prompted brokerages such as Guotai Junan Securities and Soochow Securities to say that the run has priced in most tailwinds.

“Weak macro fundamentals and expectations about interest-rate cuts are not capable of further driving down yields after a quick decline,” said Li Yong, an analyst at Soochow Securities in Beijing. “The tone of the first quarterly monetary policy report has no significant change and it’s unlikely for an adjustment in interest-rate policies in the short term. We advise a cautious stance on bonds.”

The yield on China’s 10-year government bonds fell by a combined 13.7 basis points in March and April, as investors flocked to safe assets on angst about the strength of the country’s economic growth. The yield has slid by 4.6 basis points this month to 2.729 per cent, near a six-month low. The yield on sovereign bonds maturing in one year traded at 2.066 per cent following a decline of 22 basis points since the end of February.