Chinese sovereign bonds gain on hopes of slowing economic growth

The Chinese sovereign bonds gained on Thursday after latest poll from Reuters, which showed that the world’s second-largest economy is expected to witness a shrink in gross domestic product (GDP) growth in 2016 owing to weak exports.

Also, the S&P in its latest report concluded that that the Chinese economy to expand 6.6 percent in 2016 and 6.3 percent in 2017, as compared to recent 6.7 percent in June.

The yield on the benchmark 10-year note which moves inversely to its price dipped more than 2-1/2 basis points to 2.812 percent, the yield on long-term 30-year bond fell 6-1/2 basis points to 3.430 percent and the yield on short-term 2-year note slid more than 2 basis points to 2.450 percent by 05:00 GMT.

Moreover, the Reuters in its latest report mentioned that the Chinese Gross Domestic Product (GDP) to shrink to 6.5 percent in 2016, driven by weak exports and massive industrial overcapacity are raising the stakes for policymakers keen on ensuring job growth while avoiding more serious fallout from China's mounting debt.

Interestingly, the China's external debt stood at 13 percent of GDP in 2015; this is the second lowest external debt to GDP ratio in the world, according to Moody’s report.

In addition, the median forecast in a Reuters survey of 60 economists taken in the past week is for 6.5 percent growth in 2016 - the weakest in a quarter of a century - with a further slowing to 6.3 percent in 2017 as a housing recovery that supported growth earlier this year loses momentum.

Looking ahead, we foresee that any further drop in economic growth below 6.5 percent could steer monetary easing from the People's Bank of China (PBOC). The central bank is expected to go for 25 basis points cut in 2016.

Meanwhile, China sets China sets the USD/CNY reference rate at 6.6872, 0.11 percent stronger than 6.6946, yesterday. The Shanghai Composite (SSEC) rose 0.57 percent to 3,045.31.