Bond index records year-to-date high

The S&P/CITIC China Government Bond Index, a benchmark indicator of the vitality of the nation's bond market as a whole, increased by four points in the week following the central bank's announcement that it would be easing liquidity in the interbank market, the highest weekly gain so far this year, according to figures from Bloomberg.

As the country's economy cools, Chinese enterprises are shying away from expansion, which has inevitably shrunk demand for credit and cut into loan operations at banks, who are now redirecting their idled cash into the bond market, Liu Feng, chairman of China Galaxy Securities, told the Global Times. "The recent reserve requirement ratio cut has expanded capital pools at lenders, who are using their cash swells to invest in bonds, which has bolstered investor sentiment in this market," Liu explained.

Meanwhile, Chinese firms in need of financing have also turned their attentions toward the debt market, where it is often cheaper and easier for them to raise money than at banks, Hou Qiang, an analyst from Guangdong-based China Guangfa Bank, told the Global Times yesterday.

Last month's consumer price index (CPI) dip may have also helped spark renewed confidence in Chinese bonds, said Liu. As prices for consumer goods and services fall, suggesting ample liquidity in the market, central planners may move to drain off excess money supplies by increasing interest rates at banks, Liu explained.

With the interest rates of bonds and bank loans almost always moving in concert, an uptick in lending rates would make the debt market more attractive for capital holders and diversify the sources of investment funds, said Liu.