In China, it isn’t so much what is said but who says it. Few market followers can have been surprised by a warning that China’s rising leverage poses risks. But this one came from Li Keqiang, China’s premier, to the National People’s Congress. The impression left by the Chinese premier was that Beijing’s emphasis is now on controlling risks — deleveraging in other words — as much as growth. China’s fast-evolving bond markets are already reflecting this shift.
Borrowing costs in China have been rising rapidly, and in some cases faster than US rates. Yields on two-year government bonds have jumped 42 basis points this year, compared with 11bp in the US. And there is almost a full percentage point gap between yields on Chinese 10-year bonds and their US counterparts, which is double the gap three months ago. Largely as a result of higher rates at home, mainland companies have for the first time ever issued more bonds overseas than domestically in the first two months of this year.
The driver for these moves can be found in China’s short-term money markets, where the central bank has been broadening the range of its operations. A year ago the People’s Bank of China fine-tuned its influence by starting daily liquidity operations. Last month it raised short-term repo rates for the first time since 2013 and lifted longer-term money market rates for the first time since their creation in 2014. The net effect is a tightening without resorting to the blunt instrument of raising headline interest rates and risking an economic slowdown. Hence monetary policy can still be described officially as “neutral”.