What does US bond ‘taper tantrum’ mean for China’s financial markets?

Sharp sell-off in the US Treasury bond market this week triggered declines in financial markets around the world

But China’s government bond market, in particular, has shown it is relatively resilient to the rise in US Treasury yields

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Before Thursday’s sell-off in the US Treasury bond market, Federal Reserve officials said in January that it would be “some time” before conditions to scale back their massive bond purchases were met, prompting speculation as to whether any tapering would start this year. Photo: Bloomberg

Published: 9:30pm, 26 Feb 2021Updated: 9:30pm, 26 Feb 2021

A sharp sell-off in the US Treasury bond market on Thursday – triggered by worries of higher US growth, inflation and interest rates – caused declines in financial markets around the world and evoked memories of US Federal Reserve policy moves in 2013 that resulted in a reactionary panic nicknamed the “taper tantrum”.

The 10-year US Treasury yield jumped as high as 1.6085 per cent on Thursday, returning to a level last seen before the coronavirus outbreak in the United States. The resulting sharp decline in US stock markets, and a rebound in the US dollar, heaped pressure on Asian equities and currencies on Friday.

Back in 2013, the Federal Reserve’s decision to begin scaling back, or “tapering”, its programme of buying bonds from the market to inject additional liquidity – quantitative easing – sparked an investor flight from emerging markets on fears that their markets would collapse. The financial downturn turned out to be only temporary, but investors coined the phrase “taper tantrum” to describe the sharp market reaction to the Fed’s move.

Analysts say Asia’s emerging markets have taken various measures to improve the stability of their economies, such as opening up markets and increasing their foreign exchange reserve holdings, so they are in a much better position this time around to withstand any sudden shifts in capital flows.

In 2013, five emerging Asia economies – including Thailand, Indonesia and India – all had large current account deficits, making them vulnerable to shifts in capital flows. The only Asian emerging market countries with deficits now are Pakistan and Sri Lanka, according to Gareth Leather, senior Asia economist at Capital Economics.

China’s government bond market, in particular, has shown it is relatively resilient to the rise in US Treasury yields, with optimism that the yuan (RMB) exchange rate will continue to trade in the recent range of 6.40-6.50 to the US dollar because of China’s rapid economic recovery after bringing the pandemic under control. A higher yuan exchange rate means it takes more yuan to purchase one US dollar, indicating a weaker Chinese currency.

“Conventionally, a spike in [US Treasury] yields would trigger a sell-off in emerging bond markets. [But] the story is different in China, where the country’s economy has been on a growth trajectory,” said Cary Yeung, head of Greater China debt at Pictet Asset Management (Hong Kong). “Inflation is also reasonably contained, and the pandemic is under control. These factors all contribute to stable RMB bond yields.”

Nevertheless, China’s financial and currency markets are subject to new vulnerabilities compared with eight years ago, according to analysts. For a clearer economic outlook, financial markets may need to wait until after the upcoming meeting of the National People’s Congress, the nation’s legislature, as well as for the release of first-quarter growth data in April.