Nicholas Spiro

Why China’s pandemic-induced rally is on solid ground, even as the US and EU flounder

Unlike the last global crisis, it is not China but the US and Europe that are the main shock absorbers for the world economy. While China’s debt is a concern, advanced economies’ over-reliance on ultra-loose monetary policy is a bigger one

Reading Time:3 minutes

Why you can trust SCMP

Workers tracking sales and trends in a data control room at Chinese e-commerce giant JD.com’s headquarters in Beijing on Singles’ Day, the world’s biggest retail event, on November 11. China’s economic recovery is going from strength to strength, with retail sales growing at an annualised rate of 5 per cent last month. Photo: Getty Images

Nicholas Spiro

Published: 3:30am, 18 Dec 2020Updated: 4:29am, 18 Dec 2020

Japanese pension funds have historically been regarded as the world’s most conservative investors. Yet, they were the driving force behind the record amount of Chinese government bonds bought by Japanese investors in the first 10 months of this year: US$5 billion, a 15 per cent rise compared with the same period in 2019, which itself was a bumper year, data from JPMorgan shows.

The increased appetite for Chinese debt on the part of traditionally risk-averse buyers is one of the most conspicuous signs of a regime change in markets since the Covid-19 pandemic erupted. The unprecedented virus-induced stimulus measures undertaken by the world’s leading central banks have crushed bond yields, and significantly widened divergences in policy between Western economies and China.

In stark contrast to previous global crises, when China did the heavy lifting to support growth, it is now the United States and Europe that are the main shock absorbers for the world economy. The immediate consequence is a dramatic widening in the gap in borrowing costs between the West and China, leaving the world’s second-largest economy as the only major market offering investors positive real interest rates.

The differential between the yield on benchmark 10-year US Treasury bonds and its Chinese equivalent has doubled since the start of this year to 240 basis points, turning China’s debt market into a magnet for yield-starved investors.

Moreover, China’s inclusion next year in the FTSE Russell World Government Bond Index has strengthened its bonds’ haven appeal, adding to their allure. The FTSE Russell index is one of the main gauges used by global bond investors, another being the Bloomberg Barclays Global Aggregate Index, which China joined in April 2019.

The post-pandemic surge in inflows – foreign investors bought a net US$130 billion in Chinese bonds in the year to date, compared with US$80 billion last year, data from JPMorgan shows – has contributed to a fierce rally in the yuan. It is currently at its strongest level against the US dollar since the trade war began in earnest in June 2018.