Runaway Bond Market Decline Fuels Inflationary Angst
Yicai Global
/SOURCE : Yicai
Runaway Bond Market Decline Fuels Inflationary Angst

(Yicai Global) Dec. 14 -- Since the fourth quarter's start, the once-towering Chinese bond market seems to be under a 'curse' -- capital flows tightened, yields soaring and the bulls suddenly morphing into bears -- and this trend is continuing. Market participants Yical Global has interviewed are starting to fret over the specter of resurgent inflation, though most believe this is still manageable.

"Although no money shortage is looming, expectations of inflation and tight capital flow are rising, with the bond market projected to take a continuing hit," said one bond trader.

"Investors feel that ongoing steep rises in commodity prices undoubtedly signal approaching inflation. China's producer price index (PPI soared to 3.3 percent in November from a negative 5.9 percent last December. If commodity prices continue to rise, the PPI in December will easily break 4 percent. Further, soaring oil prices have also pushed up global inflation expectations," said Wu Zhaoyin, macro-strategy director of AVIC Trust Co.

However, whether the current upswing in inflation is really sustainable remains unclear.

China is widely forecast to see a continuing upswing in inflation by the end of next year's first quarter. "Inflation next year will see a more significant increase, especially in the PPI. We think that the consumer price index (CPI) may break three percent in around March next year," said Zhao Yang, Nomura China chief economist.

However, he believes that next year's inflation will trend high to low, and annual CPI will stay below the controlled threshold of 3 percent. "But it will be relatively high in individual months, and this will test the central bank's monetary policy. But we do not think the bank will raise interest rates or tighten the currency in circulation just because the CPI broke through the three percent threshold in individual months," he added.

"Current demand side is still weak, as rising commodity prices greatly depress demand. This year is for inventory replenishment. But as long as prices fall slightly, inventory will be reduced immediately, then upstream prices will rapidly rebound," Wu said.

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