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Global Investors Cut China Sovereign Bond Holdings

bond market sell off

  • With China’s economy showing signs of slowing and the increased likelihood that Beijing will need to step in at some point to shore up its rapidly deteriorating real estate sector, global investors have cut holdings of China’s sovereign bonds for a fifth straight month in June.
  • There are a variety of factors underpinning the drop in global demand for Chinese sovereign debt, including a weakening yuan as the monetary policies of the U.S. and China diverge, falling yields relative to U.S. Treasuries and geopolitical concerns.

Culturally, the Chinese loathe debt and have historically tried to pay off any loans well in advance of when they have been due.

But decades of reform and economic expansion have remade the Chinese psyche to see debt as an instrument to gin up another indelible Chinese trait – the penchant for speculation, which is what has led to China’s current real estate crisis.

With China’s economy showing signs of slowing and the increased likelihood that Beijing will need to step in at some point to shore up its rapidly deteriorating real estate sector, global investors have cut holdings of China’s sovereign bonds for a fifth straight month in June.

It doesn’t help that rising U.S. Treasury yields have dulled the attractiveness of yuan-denominated debt and global funds held just US$340 billion of Chinese government bonds in June, according to data released by the People’s Bank of China.

There are a variety of factors underpinning the drop in global demand for Chinese sovereign debt, including a weakening yuan as the monetary policies of the U.S. and China diverge, falling yields relative to U.S. Treasuries and geopolitical concerns.

China’s benchmark 10-year yield rose 0.08% in June alone, its biggest jump since last October, on the back of a record supply of government debt and much lower liquidity.

In comparison, the benchmark U.S, 10-year Treasury yield soared by 1.69% over the same period as the U.S. Federal Reserve raised interest rates.

All this complicates matters for Beijing, at a time when a bailout of its real estate sector seems all but inevitable.

Beijing has already pledged fiscal intervention as its economy slows, to cope with rolling zero-Covid lockdowns and a prolonged property slump, including an unprecedented issuance of US$220 billion worth of special bonds for the rest of the year, heaping on more debt to the existing yuan-debt supply.

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