Scepticism over 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 buoy emerging markets. Bearish sentiment toward China has intensified as the latest data confirmed the world’s second largest economy remains in the doldrums. While the gloom adds impetus for the People’s Bank of China to lower interest rates, investors say the monetary authority has less room to cut than its major global peers, whose borrowing costs are now at multi-year highs.
“We expect the yuan to remain under pressure in the near term given the bearish expectations for China growth this year,” said Ken Cheung, chief Asian currency strategist at Mizuho Bank Ltd. in Hong Kong. “Bonds will remain supported as the PBOC will maintain an easing bias. However, renewed yuan depreciation pressure and narrow net interest margin among Chinese banks will limit the room for rate cuts.”
As China falls out of favor, traders see multiple reasons to be more positive toward its EM peers. Higher-yielding markets will have more room to gain from the Fed’s anticipated rate cuts, while South Korea and India’s potential inclusion into major global bond indexes should give their assets an added boost.
Events over the past week have been a letdown for investors. Despite mounting calls for more stimulus, the PBOC kept its one-year policy rate unchanged while Premier Li Qiang touted the nation’s ability to achieve economic expansion without resorting to massive stimulus, disheartening hopes for more policy support.
