(Bloomberg) -- The gap between Chinese and US yields will likely remain for another three years as the nation keeps interest rates low to sustain a recovery and that may weigh on global investor demand, according to Credit Agricole CIB’s Patrick Wu.

China’s yield discount to the US will remain large as monetary policies of the world’s two largest economies continue to diverge, said Wu, who’s co-head of trading for Asia-Pacific and the Middle East. The gap, which is currently close to the widest since November, will hurt demand for onshore bonds and weigh on the yuan, he added. 

The country’s financial markets have been struggling in recent months, as a string of weak economic data damped traders’ hopes for a speedy recovery following Beijing’s relaxation of Covid curbs. The yuan slid to fresh year-to-date lows on Wednesday, Chinese stocks listed in Hong Kong were poised to enter a bear market, and net foreign flows in onshore bonds turned negative in April.

On Wednesday, China reported the lowest reading for the official manufacturing purchasing managers’ index since December. That reaffirmed the view that monetary policy needs to remain loose to support growth. 

“The reopening trade is over and now you can really feel the divergence,” Wu, who began his career nearly two decades ago trading offshore yuan assets, said in an interview on Monday. “Global traders won’t be going onshore to buy assets big-time now.” 

Goldman Sachs Group Inc. and Nomura Holdings Inc. are calling for further policy easing as most economic data China released since the start of May have missed forecasts. Meanwhile in the US, the Federal Reserve is expected to boost interest rates again by July to combat still-elevated inflation. 

That means China’s 10-year yield discount to the US, which is around 100 basis points now, will remain wide or even extend further. Such a move would undermine the appeal of yuan-denominated securities relative to higher-yielding dollar assets. 

The onshore yuan dropped below 7.10 per dollar on Wednesday, taking its decline this month to 2.8%. The currency will weaken to 7.25 in the coming months, said Wu, who has worked at the likes of Standard Chartered Plc, JPMorgan Chase & Co. and Australia & New Zealand Banking Group Ltd. He also serves on industry groups that helped develop trading channels such as the China-Hong Kong Swap Connect.

The People’s Bank of China will adopt a gradual pace of policy easing to prevent a rapid depreciation in the yuan, Wu said. But a reduction in the medium-term lending facility rate is unlikely, as such a move would suggest the authorities want a weaker currency and spur more flows into bonds rather than loans.

“Right now the big trade is not to speculate on China,” Wu said. “In order to repair confidence properly, government policy needs to stay very stable and right now there’s geopolitics, there’s imbalance and there’s uncertainty on the data.”

--With assistance from Joanna Ossinger.

(Updates the story throughout to incorporate China’s latest PMI, performance of the stock market and latest prices of the yuan.)

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