Economists are forecasting that the People's Bank of China is more likely to raise interest rates than cut them in the coming year, even as they slash growth projections for the world's second-largest economy.
Eight of 15 analysts surveyed project an increase in the benchmark deposit rate by the end of June next year, compared with two who see a reduction.
The survey showed economists cut their forecast for the 10-year bond yield by 30 basis points in the past month to 3.5 per cent, while keeping their two-year yield forecast at 3.08 per cent, based on median estimates.
The government "seems to have become more tolerant" of weaker growth, UBS says, as Premier Li Keqiang grapples with credit expansion and price gains seen approaching the official target.
The gap between two and 10-year yields has narrowed to an 18-month low of 38 basis points, suggesting the market is anticipating a slowdown without stimulus.
"As long as growth is within the range of 7 to 7.5 per cent, there's no need to stimulate growth with interest-rate cuts," said Li Wei, an economist at Standard Chartered, which is forecasting a deposit-rate increase to 3.75 per cent until the second quarter of next year from 3 per cent now. "Concerns still exist on local government debt risks and property price rebounds."
Standard Chartered this month lowered its growth forecast for this year to 7.7 per cent from 8.3 per cent. Other respondents forecasting an interest-rate increase include JP Morgan Chase, Daiwa Capital Markets, BNP Paribas and Banco Bilbao Vizcaya Argentaria. Analysts at Mizuho Securities Asia and Norddeutsche Landesbank Girozentrale projected a reduction.
Economists made their biggest cuts to growth projections since September last year, trimming the outlooks for this year and next by 0.2 percentage point to 7.8 per cent. The economy expanded 7.8 per cent last year, the slowest pace in 13 years.
The reductions follow an unexpected slowdown in first-quarter growth to 7.7 per cent and last month's data on investment and factory output that missed forecasts.
A preliminary purchasing managers' index released yesterday by HSBC and Markit Economics showed a drop this month to 49.6, less than the final 50.4 for last month and the 50.4 median estimate in a survey. It signals the first contraction in seven months.
The yield on 10-year government bonds fell one basis point to 3.42 per cent in the past month. The rate on two-year debt rose four basis points to 3.03 per cent.