The Market’s Next Headache: China’s (Not So) Stealth Tightening

While much of the attention in the past month has focused on the rising interest rates among the Developed markets, a just as troubling development is taking place in China where as BofA’s David Cui observes, interest rates are set for sustained upward pressure over the next few quarters, for the fifth time since 2006.
Since Oct 21, yield of 10Y Chinese Government Bond (CGB) has risen by 20bps, from 2.65% to 2.85%, partly in response to the strong global rates and USD move since the US election. Cui expects the yield to rise further to 3.40% by the end of 2017. Furthermore, with credit spreads near all-time lows, the bank warns that there is a risk that it may widen sharply at some point.
As Cui further writes, the local equity market reacted progressively less favorably to rising rates the last four times as investors turned progressively less optimistic about growth outlook. The bank believes that “the rising rates this time may put pressure on equities in general as it would occur in an environment of lackluster growth.” Sector wise, property, materials and utilities may suffer the most; while insurers, IT and consumer may benefit. That said, please bear in mind that interest rate is only one of the major drivers of the equity market.

This post was published at Zero Hedge on Nov 28, 2016.

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