Inflation fears return to haunt China bonds

by Mark Mccord in

Financials gauge rises on hopes of cashing in on the opening of offshore leg of Chinese cross-border bond trading scheme 

(ATF) Returns on a key China bond index slid Thursday in line with Asian stock markets as concern that inflation will rise returned to haunt investors.

Financial bonds gained after Hong Kong’s financial chief said he hoped to see the launch this year of a scheme to give mainland investors grater access to global bond markets.

The benchmark ATF China Bond 50 Index of AAA rated corporate and local government credits fell 0.01% to 106.82, extending losses in the past week to 0.15%. The measure has been in decline amid a global selloff in bonds and risk assets. Investors have been pulling back on concern that pent-up demand during pandemic lockdowns of the past year will be unleashed as the global vaccine rollout tames Covid’s spread. 

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While those forecasts are good for the real economy, markets fear the sudden surge in spending will send inflation higher. Bonds tend to fall when consumer and producer prices rise because higher living costs erode the value of the fixed payments on the securities.

A measure of financial company bonds climbed 0.02%.

Hong Kong Financial Secretary Paul Chan Mo-po told the South China Morning Post newspaper that the so-called southbound leg of the Bond Connect scheme to promote cross-border debt trading will launch this year.

“We are doing out best,” Chan said when asked when this year the programme would go live.

China’s financial companies are expected to reap a fees windfall from managing the trades of mainland investors via their offshore, Hong Kong-based subsidiaries.