China hot money inflows maintain pace, but risks ahead as US edges towards rate increase
- Foreign holdings of interbank bonds reached 4.07 trillion yuan (US$640 billion) at the end of January
- But a test is looming as the US Federal Reserve is poised to respond to record inflation with more aggressive rate increases, while China is easing its monetary stance
Foreign investors continued to pour money into China’s bond market last month, but analysts have warned that challenges will start to mount due to Beijing’s policy divergence with the United States.
Inflows have provided a sweet spot for policymakers as foreign holdings of interbank bonds reached 4.07 trillion yuan (US$640 billion) at the end of January, which represents around 3.5 per cent of the market total, according to data released by the People’s Bank of China (PBOC) on Monday.
The net increase was 70 billion yuan last month, down from 78.7 billion yuan in December and 80 billion yuan in November.
The new inflows – which amounted to US$166.6 billion last year and US$186.1 billion in 2020 – have been widely viewed as a signal of China’s economic fundamentals and financial depth.
China hasn’t seen obvious capital outflows
“China hasn’t seen obvious capital outflows,” said Zhou Hao, a senior emerging markets economist with Commerzbank.
The interest rate gap between China and the US remains at an appropriate level, with the yield of 10-year Chinese treasury bonds at 2.81 per cent, higher than 1.98 per cent for the US treasury bills.
The coronavirus, inflation and monetary policy adjustments made by major economies are regarded as the major uncertainties that haunt the global economy, according to the PBOC’s fourth quarter monetary policy report released on Friday.
Don’t dismiss ‘negative impact’ of US rate hike out of hand, China urged
China will release its January inflation data on Wednesday, with the official consumer price index expected to slow to 1 per cent growth last month, with the producer price index predicted to fall to 9.5 per cent growth.
“We’ll spare no efforts in stabilising the macroeconomy, trying to provide an appropriate monetary and financial environment for the national economy to stay in a reasonable range,” the PBOC report said.
Beijing is widely believed to be seeking an economic growth of above 5 per cent for 2022 as it seeks stability in the year it is hosting the Winter Olympics and with a leadership reshuffle expected later this year.
The central bank said that it will strengthen the flexibility of the exchange rate and make it an “automatic stabiliser” in face of external shocks which may disrupt capital flows and the value of the yuan, which have the potential to trigger capital outflows.
“We’ll strengthen the macroprudential management of cross-border capital flows, strengthen the management of expectations, and guide market players to establish a risk-neutral business model,” it said in Friday’s report.
Zhou said the central bank will not support a strong yuan, and instead the exchange rate could trend down toward 6.7 at the end of 2022 from its current level of just above 6.3.
The US hasn’t yet raised rates. It would be better to check how it will impact the Chinese economy in the second half of this year
After the central bank sold 300 billion yuan of one-year medium-term lending facilities and 10 billion yuan of seven-day reverse repos on Tuesday, Julian Evans-Pritchard, a senior China economist with Capital Economics, said it was the only a matter of time before the PBOC resumes its rate reductions.
“The upshot is that more easing is likely on the horizon. We anticipate another 20 basis points of policy rate cuts by the middle of this year and a further modest acceleration in credit growth,” he said.
Tao Chuan, chief macro analyst at Soochow Securities, said the US Federal Reserve’s accelerated pace of tightening will squeeze the room for large-scale loosening.
“To maintain the overall stability of the yuan exchange rate and prevent potential massive outflows … we think March would be the best time window to lower rates,” he added.
