In the past decade, China has experienced three periods of notable yield curve steepening; first from October 2006 to July 2007, then from November 2008 to October 2009 and then again from July 2010 to November 2010. We analyzed the yield difference of 10-year China Government Bond Yields and the blended deposit rate between the benchmark demand deposit rate and the 1-year term deposit rate. We found that, in 2006/7, the yield gap widened by 136bps, from 1.28% to 2.64%, whereas in 2008/9, the yield difference widened by 1.72%, from 0.74% to 2.46%. During these two periods, China enjoyed a notable recovery in GDP growth, with inflation largely under control. In the case of 2010, the respective yield gap had expanded by 68bps, from 1.91% to 2.59%.
In these three cases, the key driver behind the yield curve steepening differed. In 2006/7 and 2010, the steepening was driven by an increase in long-term yields, reflecting a stronger economy, whereas in 2008/9, the steepening was driven by a significant drop in short-term rates as a result of interest rate cuts, as a policy response to the global financial crisis and a subsequent recovery in long-term yields.
The share prices of the H-share listed Chinese financial companies (both banks andinsurance companies) had appreciated sharply during the respective periods of yield curve steepening, reflecting higher net interest income for banks as a result of higher reinvestment yields and stronger loan pricing power, as well as better investment income for insurers. Figure 41 shows the high positive correlation between the yield spreads and the performance of the H-share Finance Index since 2005.
Eoin Treacy's view
As inflationary pressures moderate and as the outlook for global growth improves,
central banks remain slow to raise interest rates for fear that they might derail
the expansion. The US yield curve spread
(10-2yr) hit a medium-term low in May of last year and has held a modest progression
of higher reaction lows since. It found support this week in the region of 160
basis points and a sustained move below that level would be required to question
potential for further expansion.
The equivalent Chinese spread hit a medium-term low just above 0 in October and has stabilised near 50 basis points over the last month. A rally from this area would suggest further easing of monetary policy. The FTSE/Xinhua A600 Banks Index found support this week in the region of the psychological 10000. While there remains some scope for ranging as it reverts towards the mean, a sustained move below 200-day MA, currently near 8700, would be required to question medium-term recovery potential.
More generally, yield curve spreads for much of the rest of Asia have also found medium-term lows and rallied somewhat over the last few months. Perhaps the most impressive widening has been in Thailand where the spread moved from just above zero to 80 basis points since July. This at least partially explains the outperformance of its stock market.
Yield curve spread for Indonesia, South Korea, Singapore, Taiwan and Philippines can now also be found the Chart Library.