Chinese Bonds may Surge

The massive stimuli plan requires fund to operate. With the reduction of export and the growth of foreign currency reserve, Chinese government cannot print as much money as last year. While rising RMB rate is a method, the side-effect of further hammering the already-at-stake manufacturing industry is too much to risk of. Even though the isolation from many of the foreign financial products prevents massive write-offs, banks in China will still be prudent on loans due to the reduction of risk premium by interest rate cut. Therefore, a plausible plan for Chinese government is to issue bonds at a low price and a high yield to collect money from the public. With the expectation that further interest rate cut may follow, the bond price has the potential to rise. It can be furthered by the rather lack of choices on financial products.

Nevertheless, it will enlarge the financial deficit of Chinese government and may act as a disfavorable factor on the future RMB rate.