The inversion of the 10-year government bond spread between China and the United States for the first time in nearly 12 years is expected to put pressure on the Chinese currency exchange rate.
According to China Daily, the U.S. 10-year Treasury yield increased by 5.5 basis points to 2.76% on April 11, while the comparable Chinese yield stayed unchanged at 2.75%. Hence, China’s long-time yield advantage over U.S. Treasuries vanished.
According to the Hong Kong Economic Times, the inversion of the China- U.S. interest rate differential may reduce the attractiveness of Chinese assets such as the yuan, which is the best performing currency in Asia this year.
Data from China Central Depository & Clearing Co (CCDC) and the Shanghai Clearing House showed that foreign institutions’ holdings of Chinese government bonds decreased to 3.88 trillion yuan ($601.4 billion) at the end of March, down from 3.99 trillion yuan ($625.55 billion) a month earlier.
Some experts have shared factors that could play a role in the yuan depreciation.
According to Frances Cheung, an interest rate strategist at OCBC Bank, the lower amount of paper losses in investing in Chinese government bonds may not be enough to make up losses from tighter spreads.
She expected that foreign capital involvement in China’s bond market could face difficulties in the near future.
In addition, Edmund Goh, head of fixed income at Aberdeen Standard Investments, said, “Investors are concerned about yuan valuation if China no longer has a higher interest rate advantage.”
Qu Qing, a chief economist at Jianghai Securities, said that the inversion of the U.S.-China yield curve was under pressure to some extent for the mainland amid rising U.S. interest rates.
Chang Ran, a senior researcher at the Plantation Investment Research Institute, said the inversion of the U.S.-China interest rate differential does not necessarily lead to the depreciation of the yuan exchange rate.
Ran said that the current account and the financial account of the balance of payments are the main channels that directly affect the appreciation and depreciation of the yuan exchange rate.
Chang Ran added that, in the coming period, the yuan exchange rate could depreciate in the midst of phase fluctuations under the comprehensive influence of mainland foreign exchange settlement, international geopolitics, and monetary policies of overseas central banks.