“The significant yield gap, the largest since 2007, could be a key reason why capital remains planted in US dollars and US Treasuries for the time being,” said David Chao, global market strategist at Asia Pacific at Invesco.
“More broadly, recent economic data releases in China have been disappointing, while those in the U.S. have surprised to the upside.”
The widening yield gap reduced foreign appetite in China’s onshore yuan bonds, with latest official data showing overseas investors’ holding declined in July.
Tumbling credit growth and rising deflation risks in July warranted more monetary easing measures to arrest the slowdown, market watchers said, while default risks at some major property developers and missed payments by a private wealth manager also hurt confidence in China’s financial markets.
In derivatives market, one-year interest rate swaps, a gauge that measures investor expectations of future funding costs, fell to 1.84% this week, the lowest since September 2022, suggesting some market participants are pricing in further rate reductions.
But the expectations for further monetary easing and capital outflow risks has pressure on the Chinese yuan to depreciate further. The yuan has lost about 5.5% against the dollar since the start of the year, making it one of the worst performing Asian currencies.
“The PBOC will need to do more to manage the pace of yuan depreciation,” Eugenia Victorino, head of Asia strategy at SEB, said in a note.
Source: by Winni Zhou and Tom Westbrook, editing by Simon Cameron-Moore
