Eoin Treacy's view -
Chinese authorities are attempting to delever their excessive levels of DEBT, which is causing a lack of credit at the short end of the curve, which in turn is driving up the cost of borrowing money at the short end.
Hence , short rates are higher than long rates.
However, unlike in the West, where an Inverted Yield curve signals trouble to the economy and to equities, having an Inverted Yield Curve is NORMAL in China.
This Inverted Yield Curve has been the situation for the majority of the last decade.
The red shaded area shows the times when 3 Month SHIBOR has been above 10 year government yields.
Currently the 3 Month SHIBOR is at 4.44%, higher than the 10 year at 3.61%
The AA 5 year rates have moved quite dramatically since last Oct, from a yield of 3.6% to 5.6% now.
This rise in their cost of debt should be negative for Equities.
Equities (SHCOMP) have indeed broken their uptrend and will remain an avoid until they can regain the 3200 level.
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China’s wide divergence between lending and deposit rates as well as the de facto state control of the banking system tend to skew financial conditions so that while an inverted yield curve is an omen of stress in the West, it is apparently less of a factor in China.
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