Depression about Chinese assets spreads beyond stocks

Skepticism about Chinese assets is spreading beyond stocks, with investors expecting the yuan and government bonds to underperform in a year when the Federal Reserve’s dovish pivot is set to boost emerging markets. Bearish sentiment toward China has intensified as the latest data confirms that the world’s second-largest economy remains in recession. The recession has prompted the People’s Bank of China to cut interest rates, but investors say the monetary authority has less room to cut rates than major global banks, whose borrowing costs are currently at multi-year highs.
“Given the weak outlook for Chinese growth this year, we expect the yuan to remain under pressure in the near term,” said Ken Cheng, Asia currency strategist at Mizuho Bank. “Bonds will continue to be supported as the People’s Bank of China will maintain its easing stance. However, new downward pressure on the yuan and narrow net interest margins among Chinese banks will limit room for rate cuts.”

As China falls out of favor, traders see many reasons to be more positive about emerging markets. High-yield markets stand to gain more from the Federal Reserve’s expected interest rate cuts, and the potential inclusion of South Korea and India in major global bond indices will boost assets further.

The events of the past week have disappointed investors. Despite growing calls for additional stimulus, the PBOC kept policy rates on hold for one year, while Premier Li Qiang praised the country’s ability to achieve economic expansion without resorting to large-scale stimulus. Hopes for further policy support were dashed.