Widening US-China yield gap could boost yuan’s global role, expert says

Can China use widening yield gap between the US dollar and yuan to boost global role?

The 10-year US Treasury yield stood at 5.22 per cent on Thursday, while Chinese government bonds yielded 1.69 per cent on their first trading day after the National Day holiday.

That created a gap of about 3.5 percentage points, although it remained below the record 3.7 percentage points recorded on September 9.

Pressure on yuan assets

The widening difference highlights the opposing conditions facing the US dollar and yuan.

According to Jiang Zhenlong, an associate research fellow at the Chinese Academy of Social Sciences’ Institute of Finance and Banking, higher US yields reduce the appeal of yuan assets.

He argued that this also adds pressure on the exchange rate and capital flows.

The concern is that higher returns on US assets can affect investment allocation, while the lower yield on Chinese government bonds makes yuan-denominated assets less attractive by comparison.

A possible financing advantage

Jiang also pointed to another effect of the yield gap: higher US yields raise dollar funding costs.

“The China-US yield inversion presents an asymmetric effect: pressure on the asset allocation side and benefit on the financing side,” he wrote in the latest issue of China Money Market, a central bank-affiliated magazine.

This creates a contrast for Beijing.

The low interest rate of the yuan could be leveraged to increase the currency’s worldwide use, an expert said, even as the yield difference weakens the appeal of yuan assets.

Jiang’s assessment suggests that the same gap producing pressure for yuan asset allocation may also create an advantage on the financing side.

Source: South China Morning Post