Barbarians Suddenly at the Gate: An Ironic Twist to China’s Fiscal Restraint

China still has considerable fiscal space to expand its government balance sheet to manage long-term debt problems.  That expansion may happen faster than expected, ironically because foreign investors have become a key source of marginal demand in the market for Chinese Government Bonds (CGBs), large enough to have a material impact on CGB yields. Foreign investors’ presence in the CGB market is already roughly equivalent to China’s own presence in the US Treasury market.  China still needs portfolio inflows and Beijing is working to encourage foreign investors to diversify their bond investments beyond CGBs, but more government bond issuance and fiscalization of debt are also likely.

Posted September 18, 2018
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