Chinese assets stand out as oasis of calm amid SVB fallout

Chinese assets stand out as oasis of calm amid SVB fallout
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(March 14): Chinese markets have been notably unperturbed by the global convulsions sparked by the fallout from a sudden rush of US banking failures.

The biggest drop in two-year Treasury yields since the early 1980s hasn’t had much impact on their Chinese equivalents, which have barely moved. Onshore credit spreads haven’t budged since last Friday (March 10), while mainland Chinese stocks rallied on Monday on signs that monetary policy will largely be stable this year. They fared much better amid a broad equity sell-off on Tuesday.

Yuan assets are likely to be shielded from the market tumult fuelled by concerns of US systemic banking risks as investors cement bets on China’s economic recovery. The yuan will strengthen as the US turmoil now puts the US Federal Reserve nearer to the peak in policy rates, said Eugenia Fabon Victorino, the head of Asia strategy at Skandinaviska Enskilda Banken AB. 

“China’s growth story is not negated by the fallout of Silicon Valley Bank,” Singapore-based Victorino said. “The central bank has been very good at imposing discipline on smaller banks to manage interest-rate risk,” which was “actually the weak link in the US”, she said.

The collapse of SVB raised concerns that banks hit by rising interest rates will prompt the Fed to reassess its tightening path, with Goldman Sachs Group Inc and Pacific Investment Management Co saying the FOMC may now take a breather. That would result in a narrowing rate differential with China, and boost the appeal of yuan assets. 

Yields on China 10-year government notes stood at 2.87% on Tuesday while their US equivalent consolidated at 3.5%. Asian bonds were under pressure, with South Korea’s three-year yield falling to a five-week low and similar-tenor Indian yields declining.

Chinese equities are likely to benefit from both a weaker dollar and greater appetite for risk from a more supportive policy regime onshore, said John Woods, the chief investment officer for the Asia-Pacific region at Credit Suisse Group AG. 

“If we do start to reprice the so-called pivot or pause, the dollar is likely to weaken and that typically has a more supportive impact on Asia in general, and China in particular through the resumption of capital inflows,” Woods said on Bloomberg Television. 

In the longer run, China’s currency may be an unexpected safe haven if the credibility of the US financial system is called into question, according to Bloomberg Intelligence. 

The yuan advanced as much as 1.2% on Monday to a one-month high before retreating to 6.8685 per dollar as of 4pm on Tuesday. Chinese stocks have fared better than the broader Asian equity market, with the benchmark CSI 300 Index shedding 1.2% in the last four sessions compared to losses of 3.1% for the MSCI Emerging Markets Index in the same period. 

Official data on Wednesday will likely show a rebound in retail sales, industrial output and investment for the first two months of the year, according to forecasts. The reappointment of People’s Bank of China governor Yi Gang and other economic leaders is also an indication of China’s intention to maintain policy consistency in a bid to boost investor confidence and engineer a post-Covid recovery.

Lower interest-rate risk in China from milder inflation relative to some developed markets will also drive fast money inflows into the country’s assets, said Zhaopeng Xing, a rates strategist at Australia & New Zealand Banking Group Ltd in Shanghai. 

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