China Afternoon Missive
Gauging the direction of certain Chinese asset classes isn’t all that difficult. A benefit of the country having what is, in reality, a closed capital account. There’re equities, fixed income, cash or property.
There is certainly some leakage into other markets, such as we are seeing of late with Chinese flows into Hong Kong stocks. Overall, however, these are either a temporary or marginal flows of funds. The vast majority moves in and out of the four highlighted above.
The reason for bringing this issue up is that Chinese government bonds are now reversing the very trend that raged all last year. Bonds are being sold, and stocks are being bought.
So much was made throughout 2024 that the yields of Chinese government bonds were in “freefall” – so said the business headlines and every macro trader – and the explanation was deemed simple. China faced a collapsing economy and, with that, the threat of a serious deflationary spiral. Yes, there was some of that. But the real engine driving yields down was the wall of Chinese money seeking the safety trade. And that is now reversing.
Think about it. China just announced the first CPI deflation in years and yet government bond yields RISE? That just can’t be! The macro folks out there will need to come up with some sort of explanation.
Just know, the reason why yields are rising is simply because Chinese investors are selling bonds and redeploying the capital into Stocks. Right now that would be heavily skewed towards Hong Kong. We will have to wait and see if that ends up expanding to include RMB denominated stocks in Shanghai or Shenzhen.
Chinese government bond yields jump amid renewed economic hopes, rate cut delays
CNBC
China bond yields jump to three-month highs as investors pare rate cut expectations
Chinese government bond yields moved further away from January's historic lows amid optimism in the faltering economy and a stock market rally.
