How China’s onshore bond market can overcome the US trade war, a slumping yuan and slowing growth

Beijing’s preemptive policy reforms have substantially increased demand for the onshore bond market in recent years. Even the declining value of the Chinese currency looks temporary, as increased overseas business means more use

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People cross a street in the Beijing Central Business District on March 4. In July, S&P Global Ratings became the first foreign credit-rating company to rate domestic Chinese bonds, awarding a AAA rating to ICBC Financial Leasing. Photo: Reuters

Published: 4:00pm, 27 Aug 2019Updated: 10:29pm, 27 Aug 2019

A weak yuan, lingering trade tensions and slower growth might seem like the perfect storm for China. But the country’s US$13 trillion onshore bond market is well placed to overcome these challenges.

The renminbi has recently fallen through the key seven-to-the-dollar level for the first time in a decade. Volatility will prevail in the short term but there are good reasons for the currency to regain ground further down the road.

For one, China appears to be building up a trade surplus as exports with neighbouring countries have picked up, filling the gap left by the exodus of American buyers, at a time when imports are falling.

Interest rate differentials between China and the US, and other developed economies, are widening as investors expect central banks of major industrialised nations to provide monetary stimulus to support the economy.

China, on the other hand, is unlikely to cut the benchmark cost of borrowing aggressively. Instead, it will implement targeted policy measures designed to support small and medium-sized companies – those most vulnerable to the negative effects of the trade war – while reducing private-sector debt.

Furthermore, the People’s Bank of China has been providing sufficient liquidity to the financial system through different policy tools, such as open market operations, medium-term lending facilities and cuts in reserve requirement ratios. All of these should be beneficial for the onshore bond market.