The IMF says China’s outflow shows a deeper divergence with the United States
The IMF says China’s outflow shows a deeper divergence with the United States

The IMF says China’s outflow shows a deeper divergence with the United States

(Bloomberg) – Investor outflows from China reflect a deeper divergence in monetary policy between the world’s two largest economies.

The Federal Reserve has signaled aggressive rate hikes, while the People’s Bank of China has eased policy, and that gap erodes the interest rate differential between the two economies, prompting investors to look elsewhere, according to Helge Berger, head of the International Monetary Fund’s China mission.

China’s 10 – year benchmark government bonds now offer no yield advantage over comparable US government bonds for the first time since 2010.

“These are the laws of international macroeconomics at work,” Berger said in an interview. “We are seeing a marked change in China’s relative interest rate position, which is strongly correlated with declining growth, while we have the opposite in key advanced economies, especially the United States.”

The outflow from China’s equities, bonds and mutual funds accelerated following Russia’s invasion of Ukraine in February. Global funds sold more than $ 7 billion of mainland equities through stock exchanges with Hong Kong in March and sold $ 14 billion in Chinese sovereign debt over the past two months.

China’s economy, which is slowing down under the weight of rolling shutdowns to slow the spread of Covid-19, has prompted a wave of downgrades in China’s growth forecasts. The IMF predicts China’s economy to grow 4.4%, down from an earlier estimate of 4.8% and compared to the government’s official target of around 5.5%.

The declining outlook and falling interest rate differentials are weighing on the yuan, which fell to its weakest level in six months. Any sign of a slowdown in China’s export boom will also weigh on global investors.

Still, the pace of outflow appears to be limited, at least so far.

“What we’re seeing is really small compared to the massive influx we’ve seen over the last two years,” Berger said. “Both of these central banks are responding to changing domestic conditions.”

© 2022 Bloomberg LP


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