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Macroscope | China bonds set for breakout year as attractive yields defy US sell-off
- China’s debt market has seen record inflows recently thanks to its yields, policy support and opening to foreign investment
- The yuan has already benefited from the surge in capital inflows, helping promote internationalisation of the currency
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Chinese stocks are in a downward spiral. Since hitting an all-time high on February 10, the CSI 300 index of Shanghai and Shenzen-listed shares has plunged almost 14 per cent, the sharpest decline among the world’s leading equity markets.
A confluence of factors, including Chinese policymakers’ repeated warnings of asset bubbles and their calls for a clampdown on financial risk, have dampened sentiment. Even the buying power of state-backed funds failed to shore up the market.
Yet, it is not equities that are the main source of vulnerability in the financial system this year – instead, it is government bonds. The MSCI All-Country World Index, a leading gauge of shares in developed and developing economies, is still in positive territory for the year. On the other hand, the Bloomberg Barclays Global Aggregate Index, which tracks investment-grade debt in advanced and emerging markets, is down almost 4 per cent.
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The combination of a massive fiscal stimulus package in the United States and the optimism generated by the mass roll-out of vaccines against the Covid-19 pandemic has brightened the outlook for global growth. This has raised inflation expectations and fuelled speculation of an earlier-than-anticipated withdrawal of monetary stimulus.
The yield on the benchmark 10-year US Treasury bond has shot up 60 basis points this year to more than 1.5 per cent, a staggering increase for the typically sedate and steady US debt market.
The sell-off has hit longer-dated bonds in other developed markets, sparking fears of a destabilising rise in yields that could inflict severe pain on other asset classes. That could threaten the credibility of major central banks, which have pledged to keep policy ultra-loose until the recovery is firmly entrenched.
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