Portfolio outflows from China’s bond and equity markets are picking up. Narrowing China-US yield spreads have made Chinese bonds less attractive, while China’s perceived alignment with Russia has raised political risks associated with holdings of Chinese securities. The key question is whether the recent surge in outflows is a blip or a meaningful inflection point in China’s integration into global financial markets.
The current pressure from capital outflows will not delay PBOC monetary easing moves, and domestic interest rates will fall further to spur credit demand. The currency has come under pressure from accelerating outflows, while the current account surplus is likely to shrink as China’s terms of trade adjust from higher imported commodity prices.
