China Bonds: August 2011
August 30, 2011
Against a background of slowing global economic recovery, the policy focus in China, as in many other countries, switched to growth rather than inflation. Not all policy signals were unambiguous, however, and the most noteworthy—a decision by the People’s Bank of China (PBOC) to extend the reserve requirement ratio (RRR) to banks’ margin deposits—caused some confusion. On balance, it appeared likely to act as a not-too-onerous check on liquidity growth that was well calibrated to the growing sense of economic uncertainty.
The portfolio produced a positive return. We are positioned at the front end of the Chinese government bond (CGB) curve with maturities from late 2011 to mid 2012. The overall duration on the fund is 0.23 years. Yields on front end CGBs increased over the month, detracting on the yield accrual. The major source of the positive return on the fund was the appreciation of the renminbi.