Global Rates: China’s slowing growth spills over


Watching for spillovers from China.
Group Research, Eugene Leow16 Aug 2022
    Photo credit: Unsplash Photo


    The 10bps cut in the 1Y MLF by the PBoC (see here) may have global ramifications on global rates. China’s economy has been facing considerable challenges in recent months but the PBoC has until very recently, refrained from taking overt easing steps. Instead, liquidity (as represented by the 7D repo) has been kept loose. However, the string of weak industrial production, retail sales and fixed assets investments finally changed the equation. The 2015/2016 episode is a ready point of comparison. Back then, the Fed had indicated that it wanted to hike rates four times (25bps each) a year. However, all the Fed could manage was once per year in both years. And that is largely because the Chinese economy is sizable enough to have global spill overs. Amidst RMB weakness and stresses in CNH interest rates, financial conditions deteriorated sufficiently such that the Fed had to slow the pace of normalization.  



    In the current cycle, the PBoC is also not in sync with the Fed. Having exited loose monetary policy in mid-2021, there was no incentive for the PBoC to tighten even as the Fed (and other major central banks) begin tightening in earnest in 2022. This divergence did put a fair amount of stress (as shown by the deterioration in financial conditions), but the RMB was still relatively stable. Currency and Asia rates movements were considered contained despite the outsized Fed hikes. The issue lies with whether this divergence would widen and if this would trigger another round of destabilization. For now, we are closely watching to see how CNH rates and how the RMB behaves. Thus far, the market reaction seems to be mostly on the rates / yields front where normalization gets ruled out and China’s slowdown gets priced. The upshot is that a major economy is dampening global growth and inflation. Typically, this will not be ignored by US yields.  Growth worries will probably cap USD yields for the time being with the 10Y tenor closing below 2.80% last night. If the Chinese economy proves to be much weaker than anticipated or if significant spill over occurs, Fed rate hike bets would be tempered.

    Eugene Leow

    Senior Rates Strategist - G3 & Asia
    [email protected]


    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

    Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.