China Economic Net reported that surging bond yields in the United States had narrowed the scope for China to lower interest rates on April 13.
The yield spread between China’s 10-year bond and the U.S. 10-year Treasuries turned negative on April 11, for the first time since June 2010.
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 Guan Tao, chief economist at Bank Of China International, the main reason for the further contraction of the China-U.S. treasury bond yield spread is the different policy strategies and different economic development stages manifesting in the two countries. While the Federal Reserve is set to tighten monetary policy, China tends to ease further.
10-year government bond yields are generally used as a benchmark for asset returns. However, the inversion in the yield spread has raised concerns that China’s financial assets may lose some appeal compared to their U.S. counterparts. This could lead to increased capital outflow pressure on China.
While interest rate cuts could help mitigate domestic economic concerns, they may magnify capital outflows and weigh on the Chinese yuan by lowering Chinese bond rates further.
According to Yang Weiyong, an associate professor of economics at the University of International Business and Economics in Beijing, cutting interest rates now could do more harm than good to China’s economy.
Yang said China’s central bank should further lower the reserve requirement ratio (RRR), which would help inject more liquidity into the market and facilitate the financing of the real economy.