China’s bond market has quietly surged in recent weeks as the implosion of its stock market drives demand for safe assets and the central bank eases…

China’s bond market has quietly surged in recent weeks as the implosion of its stock market drives demand for safe assets and the central bank eases monetary policy to stabilise a slowing economy. 5

Yields on five-year government bonds have fallen from 3.47 per cent in early April

to 2.92 per cent yesterday. More than half of the decline has been since late August

China auctioned 10-year government bonds yesterday at the lowest yield since 2008. Some investors are worried that the debt market, the third-largest behind the US and Japan, has overheated

“We have been bullish bonds throughout the year, but looking ahead a sustained rally in bonds will probably require a further deterioration in economic growth or more aggressive easing, which does not seem to be likely,” Yang Chen, rates strategist at Bank of America Merrill Lynch in Hong Kong, wrote recently

Since China’s equity bubble burst investors have been seeking safer options. The Shanghai Composite index tumbled 43 per cent from a seven-year high on June 12 through to late August, though it has recovered slightly since. “

Meanwhile, the property market, long the investment of choice for savers, has been mired in oversupply amid falling prices

“With the stock market like this, a lot of money has nowhere to go. It can only flow into the bond market,” said Luo Wenbo, fixed-

Monetary easing and low inflation are pushing down interest rates. The central bank has cut rates five times since last November and slashed the ratio of deposits that banks must hold in reserve three times

Analysts reckon figures published yesterday, showing a further slowing in inflation in September, could prompt further easing

Corporate bonds have gained even more strongly than government bonds, with the spread between five-year government bonds and five-year corporate bonds rate AAA shrinking from more than 100 basis points in June to 75bp on Tuesday

Market participants say the biggest source of demand relates to wealth-management products, structured notes that banks market

30 per cent of all products in the first six months of the year, but that rose to 60 per cent in the third quarter, according to CN Benefit, a research group that tracks the industry. Ma Nan

Bond-based mutual funds have also recorded inflows. Fund managers are taking advantage of low short-term borrowing costs to add leverage to portfolios

According to data from the central bank, foreigners held Rmb764bn of onshore bonds at the end of June