Concern over Inflation Makes Chinese Bonds Asia’s Worst Performer

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Dec. 28 – China’s bonds became the worst performer in the Asian market for the second time in four years, due to market concerns over China’s inflationary risks and the central bank’s move to raise interest rates next year, according to a recent report on Bloomberg.

Local currency government bonds are reported to have a return of 1.7 percent in 2010, the smallest among HSBC Holdings Plc Indexes that track Asia’s 10 largest economies excluding Japan.

China’s consumer price index (CPI) saw a year-on-year 5.1 percent jump in November, making price stabilization an urgent priority for the government. On December 10, the People’s Bank of China (PBC) announced an increase in the cash reserve ratio (CRR) by 50 basis points. On December 25, the PBC raised the benchmark rate by 0.25 percent once again after October’s interest rate lift. This comes in spite of concerns that a further interest rate hike may contribute to increasing speculative capital inflow which may exacerbate the country’s inflation problem.

Guo Caomin, a bond analyst at Industrial Bank (China), believes the PBC will raise interest rates five to six times next year, given the surging inflation and the sustained robust economic growth. He told Bloomberg that they are quite “pessimistic” about the bond market next year.

Societe Generale SA predicts the interest rate to see a 1 percent increase next year and government 10-year bond yields to grow to as high as 4.75 percent. DBS Bank forecasts a 1.25 percent increase in the interest rate and a similar growth in yields.

Robert Reilly, co-head of Asian fixed income at Societe Generale SA in Hong Kong comments that bonds have gone down because of the concern over inflation and the expectation of an interest-rate hike.

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