Yuan Under Pressure as U.S. Treasury Yields Top Chinese Rates
19 November 2018 - 5:07PM
Dow Jones News
By Mike Bird What's Happening
One-year government securities in China offered a yield of
2.611% Friday, slightly below the 2.684% offered by one-year U.S.
Treasury notes. As recently as the turn of 2017, the Chinese notes
offered a premium of 2 percentage points.
The shift reflects the Federal Reserve's three interest-rate
increases this year. In contrast, while the People's Bank of China
has kept its benchmark rate steady, the Chinese central bank has
eased monetary policy in other ways, such as through reducing
reserve requirements for banks, as economic growth slows.
Yields tend to affect exchange rates, as investors often flock
to higher-yielding currencies, driving up their value. This year,
the Chinese currency has neared 10-year lows against the dollar, as
trade tensions have risen.
When it comes to 10-year bonds, Chinese debt still yields more
than Treasurys. That is because prices for shorter-dated bonds have
risen more steeply this year, sending yields down. While investors
often consider 10-year yields as a country's benchmark interest
rate, differences in short-term rates are closely watched in
currency markets.
Chinese yields matter more nowadays to Western institutions.
International investors have been buying the debt like never before
through 2018--less because of the yields on offer and more because
of its expected inclusion in major global bond indexes.
Of course, gaps between yields don't always illustrate the
returns investors will actually receive: many buyers of
foreign-currency bonds will hedge their exposure to swings in
exchange rates with tools such as cross-currency basis swaps or
forwards. China's capital controls also make it hard for its own
investors to chase higher returns overseas.
What It Means
Analysts disagree on whether the yuan could weaken past seven to
the dollar, a level that Beijing has previously defended.
Goldman Sachs analysts suggest the dollar will rise past seven
yuan if trade tensions escalate. "In this case, the economic need
and market pressure for depreciation would be so large that policy
makers would likely accommodate further meaningful [yuan]
weakening," the analysts wrote in a 2019 outlook.
In contrast, Morgan Stanley analysts say U.S. economic growth
will slow relative to the rest of the world, limiting increases in
interest rates. The bank's researchers see the yuan recovering to
6.25 per dollar by the end of 2019.
The yuan's weakness has helped feed selloffs in the equity and
corporate credit markets. For Chinese companies, profits made in
yuan are worth comparatively less when translated into dollars,
while hard-currency debts become harder to service or repay.
Shen Hong contributed to this article.
Write to Mike Bird at Mike.Bird@wsj.com
(END) Dow Jones Newswires
November 19, 2018 00:52 ET (05:52 GMT)
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