2 April 2018
Author: Selena Ling, Head, Treasury Research & Strategy, OCBC Bank, Member of OCBC Wealth Panel
China’s bond market was supported by rising financial market volatility triggered by trade tension last week.
The decline of bond yield has been a global phenomenon in the past few weeks with 10-year US Treasury yield dipped to 2.75 per cent. The falling global bond yields, in our view, were mainly the result of rising suspicious about the global synchronized recovery.
The upbeat PMI over the weekend clearly showed that China’s recovery remains on track. Interestingly, PMI for small business jumped to 50.1 in March from 44.8, highest since June 2017. The volatile small business PMI shows that the reading might be distorted by Chinese New Year effect. As such, it may still be too early to conclude a strong growth outlook.
Sentiment put to test
However, market sentiment may be put to the test again this week after China’s Central Comprehensively Deepening Reforms Commission approved the new asset management rules.
It is tipped that the details of new asset management rule will be unveiled this week ahead of Qingming Festival on Thursday. The market has been preparing for the launch of new asset management rule since the PBoC unveiled the draft rule to seek public feedback in November 2017 could be one of the important event risks to China’s financial market this week as investors are concerned about the potential impact on liquidity should new rule trigger early redemption. Market will closely watch for details such as the grace period and so on.
China successfully launched Yuan denominated crude futures in Shanghai Futures Exchange last week. This is the first China listed commodity futures, among 49 future products, open to foreign investors directly. The Yuan denominated future will serve the purpose of promoting RMB Internationalization.
However, the direct impact on RMB in the near term is likely to be limited as foreign investors are allowed to use foreign currency as margin for future contract. The sharp appreciation of RMB early last week shows that market believed that China is likely to compromise in the trade tension.
History shows that U.S.-initiated trade tension always ends with Dollar depreciation. The movement of RMB may reflect market’s view about China’s position in the looming trade tension.
Qingming festival
China will be out for holiday on Thursday and Friday. Nevertheless, market will continue to monitor the development of trade tension.
China released the details on removal of tariff concession to 128 U.S. products this morning. The market is also waiting for details about Trump Administration’s Chinese tariff and investment restriction, which will be due by end of this week.
In Hong Kong, driven by the high base effect and calendar effect of Chinese New Year, the performance of trade activities slowed down in February.
Hong Kong’s exports rose by 1.7 per cent yoy while the imports decreased by 3.2 per cent yoy in February 2018.
In addition, loan growth in Hong Kong remained strong. In Macau, unemployment rate increased slightly to 1.9 per cent while the total employed population ticked up for the fourth consecutive three-month period to 378,300 in the three months through February.
Labour force participation rate surged to 70.2 per cent.
Moving forward, given a positive economic outlook, the labour market is likely to remain steady. Specifically, a weaker MOP and the scheduled opening of new entertainment projects may promote the persistent improvement in tourism sector.
As such, we expect that a further rebound in labour force participation rate and higher labour demand in tourism-related industries may be observed.
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