China has opened up a new front in its great power competition with the United States by setting its sights on the bond market, which faced a number of vulnerabilities in the past year due to the coronavirus pandemic.
The U.S. bond market is a crucial part of the American financial system as it is the marketplace where investors purchase debt securities from governmental entities and publicly-traded corporations. The federal government also uses the proceeds from Treasury bonds to pay down the national debt.
— Tracy Alloway (@tracyalloway) January 6, 2021
Currently, 10-year Treasury bonds yield around 1.05% nominally according to Market Watch — the highest it has been since March 2020 but still indicating a significant negative return. But China’s comparable 10-year bond yields are situated at 3.19% according to current market data, indicating that positive returns on Chinese bonds are much more likely.
China’s higher yielding sovereign debt could be driving a significant shift in the global financial market as it seeks to replace the U.S. as the primary beneficiary for foreign capital investment.
Former Federal Reserve governor Kevin Warsh argued in a recent Wall Street Journal (WSJ) op-ed that China’s plan to replace the U.S. as the top capital investment hub is a “critical step in its effort to establish an alternative financial and economic global ecosystem.”
Beijing has set its sights on the U.S. bond market as part of its bid for global financial supremacy, writes Kevin Warshhttps://t.co/rIL6ofCIF2
— WSJ Editorial Page (@WSJopinion) January 5, 2021
The Chinese Communist Party (CCP) unveiled its latest five-year plan outlining national initiatives between 2021 and 2025 during a plenary meeting in October. One of the reforms proposed was to further open up the country’s roughly $15 trillion bond market to foreign investors, according to Bloomberg.
Foreign investors generally have had to first purchase proxy assets from Australia or Hong Kong in order to gain access to China’s capital and bond markets. The reforms implemented under the five-year plan could make Chinese markets more attractive to foreign investors over government bonds from the U.S. or Japan. (RELATED: ‘Rob, Replicate And Replace’: Inside China’s Meteoric Rise)
“The demand is off the charts for anything liquid with a little bit of pickup in yield over Treasuries,” Columbia Threadneedle senior analyst Ed Al-Hussainy told Bloomberg.
One particular fiscal policy tool referred to as “dual circulation” aims to boost capital investment both from domestic and foreign investors, according to state-backed outlet Xinhua News. “China will see the scale of foreign trade, foreign capital utilization and outbound investment continue to expand,” said Han Wenxiu, a CCP official who helped draft the five-year plan.
Stephen Jen, who heads the hedge fund Eurizon SLJ Capital, noted that the new policy could enhance China’s position as a leading capital market. “China will turn from an exporter of goods to an exporter of capital, with significant consequences, of course, for the world,” he told Bloomberg.