Mar 14, 2023
Bond Market Split Shows China’s Economy Looks Rosier From Afar
(Bloomberg) -- The Chinese currency fell to the lowest in almost seven weeks versus the greenback on Tuesday, hit by a double whammy of a strong dollar and investors sidelined by its low carry.
Even as the dollar weakened over the past month, the yuan has treaded water with traders reluctant to step up as policymakers keep funding costs low and bond yields tethered. That’s left China’s currency vulnerable to downside pressure, especially when risk sentiment sours, boosting demand for havens.
The macro community is bearish the yuan and unwilling to go long due to negative carry, according to JPMorgan Chase & Co. analysts led by Tiffany Wang. Even after China’s first-quarter GDP expanded at a faster pace than estimated and Wall Street raised their 2023 growth forecasts, “investors now demand a much greater growth premium to compensate for the negative carry,” Wang and colleagues wrote in a note last week.
The onshore yuan lost 0.5% to close Tuesday at 6.9323 per dollar, weakening past its 200-day moving average at 6.9305. The offshore yuan fell to a session low of 6.9508 per dollar, compared with its 200-day moving average at 6.9507, before paring losses. Both currencies hit the lowest intraday levels since March 10 and further drops could put the key 7 level in sight.
The offshore Chinese yuan has declined 0.3% versus the dollar this year, while its onshore counterpart dropped 0.5%, according to data compiled by Bloomberg. Losses would almost quadruple to 1.02% for offshore and reach 1.2% for onshore if negative carry is factored in.
Chinese interest rates have diverged significantly from rest of the world since 2022, with the People’s Bank of China keeping the cost of funding low to cushion the economy from downward pressure while most other central banks raised rates aggressively. Members of China’s interest rate self-disciplinary mechanism, a regulatory body overseen by the central bank, met this month and were reportedly urged to reduce deposit rates.
“Dollar-yuan has been somewhat elevated due to sustained UST-CGB yield premium, not helped the least by expectations for rate cuts from PBOC,” said Fiona Lim, senior FX analyst at Malayan Banking Bhd in Singapore. Even as the Fed comes close to the end of its tightening cycle, “higher yielding regional currencies such as the Indonesian rupiah are more attractive than the yuan in an environment of subdued volatility,” noted Maybank’s Lim.
Last quarter, foreign investors dumped Chinese sovereign bonds at the fastest pace on record, slashing holdings by about 160 billion yuan to 2.13 trillion yuan. Global funds kept selling China’s government debt in March even as they ramped up purchases of other fixed-income products, according to the latest data released on Monday.
“Low volatility in China bonds could compensate for a still lower nominal yield level versus others to some extent, but it is not enough to attract foreign demand,” wrote Kiyong Seong, lead Asia macro strategist at Societe Generale in Hong Kong. Foreign inflows into Chinese bonds are unlikely to quickly recover as other high yielders, such as Indian and Indonesian bonds, “should be more attractive than China bonds for carry purposes,” Seong added.
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