Rising yuan supports bets on Chinese bonds

A bank clerk counts 100 yuan bills in Shanghai.

JOHANNES EISELE / AFP via Getty Images

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Call it a shot through the arc for now. China’s central bank caused a mess in the market with action on May 30 to control the yuan surge. The effect was more ripple than splash. The Chinese currency edged down three cents against the dollar, to $ 6.40, but is still up 2.5% since April 1.

“The recent strength of the Chinese currency reflects fundamentals,” said Aaron Hurd, senior currency portfolio manager at State Street Global Advisors. “[China’s central bankers] I just don’t want speculators to think this is a one-way bet.

The People’s Bank of China decision – ordering banks to reserve 7% of their foreign currency deposits instead of 5% – was good news for bond investors. They can continue to earn yields of over 3% on 10-year sovereign debt with minimal fear of devaluation.

But that won’t help stockists who are waiting for China’s happy days to return. the

iShares MSCI China

exchange-traded funds (ticker: MCHI) have stagnated for the past two months, after falling dramatically in February and March.

Rising currencies should normally boost emerging market equities, other things being equal. But other things are not equal in China. Booming internet companies had driven the market—

Tencent Holdings

(700.Hong Kong) and

Alibaba Holding Group

(BABA) make up a quarter of the index between them. They are caught in the downstream that is hitting tech stocks around the world and have been hammered home by a very public government “antitrust” campaign.

Now, there is something new for investors to worry about, says Zoey Zuo, global equity analyst at Ivy Investments: a costly race to capture the next big thing among Chinese consumers, the so-called community group purchases. It describes neighbors teaming up online for bulk grocery deliveries. Think of NextDoor and Amazon Pantry. It’s a growing company: champion of food delivery


(3690.Hong Kong) added 59 million new users in the first quarter of this year, Zuo says. And Meituan has spent over a billion dollars to do so, pushing its competition to keep pace.

“We still have an antitrust hangover, and no one knows where we are in this investment cycle,” said Zuo, who remains cautious on core Chinese stocks.

Retail investors, who are key to China’s onshore markets, are also in a bad mood after the hot stocks imploded this winter, said Jason Hsu, chief investment officer at Rayliant Global Advisors. Alibaba shares are down 20% from peak reached in mid-February; Meituan is a third. These losses outweigh any wealth effect of a rising yuan. “The volatility of stocks has wiped out a lot of the wealth,” Hsu said.

Chinese bonds are another story. Earning 1.5 percentage points more than US Treasuries, against a backdrop of the yuan appreciation, seems like a firm bet, if not one-sided, says Teresa Kong, who manages Matthews’ total return bond strategy Asia. “The government seems relatively optimistic with the current yuan levels,” she said. “They polish on the sidelines. ”

Demand for Chinese sovereign papers is expected to increase in the coming years as it gradually reaches its full weight in emerging market bond indices compiled by JP Morgan and FTSE, Kong adds. They will drop to 6% of the global benchmark, she said, from China’s current 3.5% share in the

IShares USD Emerging Market Bonds


Another exciting race for Chinese stocks is inevitable. Meanwhile, cutting coupons on bonds is not a bad strategy.

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