Biggest China bond sell-off in 3 years bodes well for stocks on signs of economic growth momentum, analysts say

Yields on 10-year government bonds jumped by 27.6 basis points in November, the most since April 2019

The preference for stocks over bonds will extend into at least the first half of next year amid a consumption rebound, according to Citic Securities

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Morning commuters enter a subway station in Shanghai on December 5, 2022. Government officials over the past week signaled a transition away from the harshest Covid containment measures, which have weighed on the economy and prompted thousands of demonstrators to take to the streets to voice their anger. Photo: Bloomberg

Published: 8:30am, 7 Dec 2022

The biggest slump in Chinese bonds in three years is an auspicious sign for stocks, as rising bond yields justify investors’ belief that a stock uptick has more room to run amid hopes for an economic surge in 2023, according to analysts.

The yield on 10-year government bonds leapt by 27.6 basis points to 2.918 per cent in November, the largest monthly increase since April 2019, according to Bloomberg data. The jump marked an end to an almost two-year bull run on the debt market, which saw the yield on the sovereign bond drop by 49.6 basis points through October from the start of 2021.

Movement of money from bonds into stocks has gained momentum over the past month as Beijing unveiled measures to reverse a downturn in the property market and as investors anticipated a pivot away from the zero-Covid approach. The CSI 300 Index of yuan-traded stocks posted a 9.8 per cent gain in November, the best monthly performance since July 2020.

The preference for stocks over bonds will extend into at least the first half of next year, when China’s economic recovery is expected to accelerate amid a strong rebound in consumption and home sales, according to Citic Securities, the nation’s biggest publicly traded brokerage. Full-year economic growth may reach 5 per cent in 2023, compared with the consensus estimate of 3.2 per cent expansion this year, it said.

A woman and child walk past the People’s Bank of China building in Beijing on March 4, 2021. Yields on 10-year government bonds rose by the most since early 2019 in November. Photo: Bloomberg

“The first half of 2023 will be the stage of the fastest economic recovery,” said Ming Ming, chief economist at the brokerage firm in Beijing. “There will be upside risk to the yields on longer-dated bonds in the first half. Meanwhile, stocks including A and H shares will probably deliver decent returns on expectations of an improvement in corporate earnings.”