Rising yields will drive up businesses' financing costs
China's treasury bond futures continued to slump on Monday, which experts said reflected the recent Federal Reserve (Fed) interest rate hike and mounting market panic caused by revelations last week of several broker-related scandals.
Experts also warned that if this situation persists and companies' financing costs surge, the real economy will suffer a blow.
In early Monday trading, the 10-year and 5-year government bond futures fell 1 percent and 0.7 percent, respectively. The 10-year government bond yield, which rises as the price declines, hit a 16-month high of 3.9 percent.
To stabilize the bond market, the People's Bank of China (PBC) on Monday injected a total of 65 billion yuan ($9.36 billion) in short-term money.
The Fed interest rate increase, as well as China's year-end capital crunch due to government efforts to deleverage, was behind the tumble in the Chinese bond market, Liu Xuezhi, a macroeconomist with Bank of Communications, told the Global Times on Monday.
For example, the 7-day Shanghai Interbank Offered Rate surged 0.6 basis point to 2.5250 percent on Monday, implying tightened interbank liquidity. The overnight rate rose to 2.3350 percent, up 0.50 basis point overnight.
"When there is a lack of capital, investors are likely to dump bonds to maintain financial liquidity," Liu Dongliang, an economist at China Merchants Bank, told the Global Times on Monday.
On Thursday, when the US Fed announced its decision to raise interest rates by 0.25 percentage point and make three increases in 2017, China's 10-year and 5-year treasury bonds futures posted their biggest plunges in price, contracting by 2 percent and 1.2 percent, leading the exchange to suspend trading.
"The market had anticipated a US interest rate hike this year, but three increases next year would be more than the market expected, and that's why the market has shown an exaggerated reaction," Liu said.
In addition, market rumors have rattled investors.
On Wednesday, the Beijing Times reported that Zhang Yang, head of Sealand Securities' bond team, had left the country and was unreachable after using a company seal to sign a nominal holding agreement with Langfang Bank for 10 billion yuan in bonds.
The bonds have incurred huge floating losses, the report said.
The company's stock was suspended on Thursday. The company said that it would resume after announcing the results of an internal investigation, which it estimated would take five trading days.
In response, on Sunday, Sealand stated on its website that the judicial institutions have confirmed that the seal stamped on the agreement was different from the one the company has on record with public security organizations. A case involving the fabrication of a seal has been filed.
It also issued a suspension notice on Monday saying that "Sealand will take responsibility in accordance with law" after the investigation is done, the statement said.
Separately, China Dragon Securities was reported on Wednesday to have defaulted on 500 million yuan in bonds, domestic news portal ifeng.com reported. The company said that "media reports are definitely inconsistent with the facts." It also decided to finish the redemption of a bond for the first time on Thursday to reassure its investors.
But "investors cannot tell whose words are true, and as a result, they tend to dump China's bond futures to evade financial risks," Liu, from Bank of Communications, explained.
In the long term, turmoils in China's bond market are likely to deal a blow to the country's real economy, experts warned.
"Bond yields are surging, inevitably pushing up interest rates on all financial products in the market … indications of this scenario have already surfaced. And this in turn will lead to a rise in corporate financing costs," Liu said.
