US-China Treasury Yields Invert for First Time in Over 12 Years... Yuan Weakness Amid Capital Outflow Concerns

China's Interest Rate Cut Moves Contradict Global Tightening Policies
US-China Tensions and Concerns Over China's Economic Growth Slowdown Also Impact

[Asia Economy Reporter Kim Hyun-jung] As US and Chinese government bond yields have inverted for the first time in over 12 years, concerns over capital outflows from China have led to a weakening of the yuan. The bond yield inversion reflects the opposing directions of monetary policies by the two countries in response to inflation and COVID-19, and if this trend continues, the pace of global capital exiting China is expected to accelerate.

According to Bloomberg on the 21st (local time), the closing yield on the US 10-year Treasury bond was 2.917%, surpassing the Chinese 10-year government bond yield of 2.868%. This is the first time in over 12 years since 2010 that US Treasury yields have exceeded Chinese government bond yields.

The inversion of the US-China bond yield spread is attributed to their 'completely opposite' monetary policies. While the US, European Union (EU), and other Western countries have embarked on tightening measures including interest rate hikes to combat rapid inflation, China is instead implementing accommodative monetary policies aimed at economic stimulus and boosting consumption.

On the 20th, the People's Bank of China (PBOC) held the Loan Prime Rate (LPR), which corresponds to the benchmark interest rate, steady after consecutive cuts in December and January. The reserve requirement ratio, which controls overall liquidity, is also being lowered. In contrast, the US is expected to continue three consecutive 'big steps' with a 0.5 percentage point rate hike next month.

Amid concerns over capital flight, the yuan has not been able to avoid weakening. The PBOC set the yuan at 6.4098 per US dollar on the day, marking a 0.3% decline compared to earlier in the week and a 1% drop compared to the beginning of the month. The offshore yuan exchange rate was 6.4765 per dollar, and domestic trading recorded 6.45 per dollar, both hitting their lowest levels since October last year.

Previously, following Russia's invasion of Ukraine, the yuan was considered a safe-haven asset, which led to its appreciation to around 6.30 per dollar at the start of the year.

The narrowing US-China interest rate spread, combined with regulations on Chinese companies listed overseas and escalating US-China tensions, has accelerated the pace of foreign investors exiting China.

Already last month, approximately 45 billion yuan (about 8.6242 trillion KRW) was net withdrawn through stock connect programs linking Hong Kong and mainland exchanges. The total sell-off by foreign investors amounted to 80.3 billion yuan, and as of March, holdings of Chinese bonds decreased by 112.5 billion yuan.

Some argue that the main factors driving capital outflows are not simply the interest rate spread but also the economic slowdown caused by China's COVID-19 policies. Eva Yi, an economist at Huatai Securities, stated, "Financial stability and economic growth have a greater impact on the yuan exchange rate than the US-China interest rate spread," adding, "The yuan exchange rate can stabilize only when China's growth stabilizes."

The International Monetary Fund (IMF) recently revised down China's annual economic growth forecast for this year from 4.8% to 4.4%. Nomura Securities also lowered its forecast from 4.3% to 3.9%. Both figures fall significantly short of China's growth target of 5.5%.

This content was produced with the assistance of AI translation services.