The Chinese yuan is getting little relief from signs of economic recovery as the bond yield gap with the US widens to the most since 2002, sapping the appeal of the nation’s assets.
(Bloomberg) — The Chinese yuan is getting little relief from signs of economic recovery as the bond yield gap with the US widens to the most since 2002, sapping the appeal of the nation’s assets.
Gains in the onshore yuan on Wednesday following better-than-expected economic growth and retail sales data evaporated in a matter of a few hours. China’s benchmark 10-year government bond yield trades about 220 basis points below that of comparable US Treasuries, compared to the average 120 basis points premium over the past decade.
The question is how wide the gap will get with traders expecting more US rate hikes, while the People’s Bank of China needs to keep policy supportive of the economy. The PBOC has had to step in to slow the yuan’s decline by setting stronger daily fixings and tightening offshore liquidity to squeeze short bets.
“Excessive RMB volatility gives rise to uncertainty for investment,” said Wei Liang Chang, macro strategist at DBS Bank Ltd., referring to the renminbi, which is another name for the yuan. The gap will stabilize when the US economy begins to slow from the lagged effect of the Fed’s tightening, he added.
While the PBOC’s moves have put a floor under the yuan, it’s still trading at just 0.5% above a 16-year low it touched in September. Officials reiterated their determination to prevent excessive moves in the currency at a briefing last week, adding that the interest-rate gap will gradually return to normal levels.
The yield gap has further widened this week as Treasury yields climbed to fresh multi-year highs on the back of resilient US economic data. While Chinese government yields also rose amid a jump in sovereign debt sales and some green shoots in the economy, the pace was milder. Traders also doubt the uptrend can continue as deflationary pressures and property market strains call for additional monetary easing.
It’s not yet time to go long the Chinese currency despite stabilization in economic data, according to a note by Barclays Plc strategists earlier this week.
“Ultimately what we are looking for is whether the aggregate effect is sufficient to lift market perception on China growth and business confidence. We are not there yet,” strategist Lemon Zhang wrote.
–With assistance from Miaojung Lin.
(Updates with details on China bonds, Treasury yield moves in the sixth paragraph)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.