The yield on the 10-year US Treasury bond has surged past 4.9%, while the yield on the 10-year Chinese government bond is around 1.6%, resulting in a record high yield spread between the two countries. Experts believe that this trend is accelerating capital outflows from China.
The US Department of the Treasury announced a buyback of $6 billion worth of government bonds, focusing on bonds with 10 to 20-year maturities, in an effort to improve market liquidity and alleviate the upward pressure on long-term borrowing costs. Despite this move, the yield on US government bonds continues to rise, with the 10-year Treasury yield surpassing 4.91% on September 10th.
On September 11th, the 10-year Treasury yield broke through 4.95%, reaching a new high since October 2023. The 30-year Treasury yield rose to 5.36%, the highest since June 2007.
Meanwhile, the yields on the Chinese government bonds with maturities of 10, 20, and 30 years remain in the low range, showing a flattening yield curve. According to data from the China Central Depository & Clearing Co., Ltd., the respective yields are around 1.68%, 2.13%, and 2.16%.
The significant yield difference between Chinese and US government bonds is driving the acceleration of capital outflows from China. According to Bloomberg, this is the largest recorded gap since 2002. The yield spread between the US and China continues to widen, reducing the attractiveness of Chinese assets to international and domestic investors, and increasing the pressure for capital outflows as purchasing assets such as US government bonds becomes almost risk-free.
Reports indicate that China’s yield disadvantage is not only compared to US bonds. The yields on Japanese and British government bonds are currently near multi-year highs. An index tracking global sovereign bond yields reached 3.8% this week, the highest since 2007.
In anticipation of potential market volatility, the People’s Bank of China announced on September 10th that it would conduct overnight reverse repurchase operations from September 14th to September 17th, using fixed rates and quantity bidding with a daily cap of up to 600 billion yuan.
The People’s Bank of China previously increased overnight reverse repo operations in June and conducted such operations in the middle of the month for the first time in August.
Analysts believe that the People’s Bank of China’s reverse repo operations provide short-term funding to financial institutions to stabilize market fluctuations.
In recent years, capital has been steadily flowing out of China due not only to the aforementioned reasons but also stricter control by the Chinese government, diminishing investment opportunities, deteriorating business environment, and economic slowdown in China.
Milton Ezrati, Chief Economist at a financial public relations firm, stated in an interview with New Tang Dynasty Television in August that even foreign private companies, excluding government institutions, have significantly reduced their investment projects in China. This indicates the lack of investment opportunities in the current economic situation in China.
Ezrati pointed out that the Chinese Communist Party’s ambition to control everything is driving away foreign investors. “The CCP is interfering in investment. The more the CCP intervenes in investment, the more investors are worried because their primary goal now is how to withdraw investments when the time is right.”
A source close to the Chinese Ministry of Commerce, Liu Li (pseudonym), previously revealed to media outlets that the pace of foreign capital outflow exceeds the situation presented in official data. Liu stated that foreign capital continues to steadily withdraw, with a 30% increase compared to the same period last year, a situation not seen in the past five years. She mentioned the urgent efforts to stabilize foreign investment led by a top official.
Official data from the Chinese Ministry of Commerce claims an increase in the number of newly established foreign-invested enterprises nationwide. However, Liu cast doubt on the accuracy of this data, suggesting that it is primarily meant for external consumption and may not reflect the reality on the ground.
Additionally, public reports indicate that some export-oriented enterprises in the Pearl River Delta have experienced a shift in orders from foreign customers to countries like Vietnam, India, and Mexico in recent years. The Pearl River Delta has long been a hub for foreign-invested manufacturing and export industries in China, and enterprises in the Yangtze River Delta region face similar circumstances.