China: Political And Economic Developments

This is the period in the monthly cycle that China releases most of its high frequency data. The process is well under way. Over the weekend, China reported its reserve figures that suggested capital outflows have slowed. Earlier today China reported its largest trade surplus (in dollars and yuan) since January. 

With the help of a lending spree, Chinese officials have managed apparently to stabilize the economy. Data due out over the coming days is likely to confirm this signal.  

There are several notable developments outside of the immediate economic data. First, it appears that the anticipation of the yuan formally joining the SDR has begun increasing the demand for onshore yuan bonds. Preliminary data suggest that foreign investors increased their onshore yuan bond holdings in June by the most in two years. Foreign investors boosted their holdings by CNY47.7 bln (~$7.2 bln) to CNY764 bln. The breakdown of officials and private sector holdings is not clear.  

In addition to SDR considerations, there has been some liberalization in terms of access. When China was experiencing strong inflows, officials liberalized outflows. More recently, capital outflows challenged officials and they moved to liberalize inflows. Specifically, in February, officials have allowed medium- and long-term investors easier access the onshore interbank bond market. Registration is required, but applying for permission or a quota is no longer necessary. June was the fourth consecutive month that foreigners were net buyers of onshore yuan bonds.  

There are two other considerations. First, there was the quest for yield. The premium China offered over the US on 10-year money gradually rose in H1 from about 65 bp to start the year to nearly 150 bp by early July. It was the most in nearly a year.  

Second, although MSCI decided not to include China’s A-shares in its global indices, China is still pushing for its bonds to be included in global indices that Citi, JP Morgan and Barclay’s have created. These indices are important because they serve as the benchmark for many fixed income managers.