(Yicai  Global) Nov. 26 -- The narrowing of the China-US national bond spread  does not necessarily mean capital outflows from the country will  increase, state-backed Chinese newspaper Economic Daily reported experts  as saying.

The  spread of interest rates between the two countries has been narrowing  since the turn of the year, leading to market concerns that it may put  pressure on the yuan and cause cross-border capital to flow out of the  country, the report said. 

The  reversal of the China-US national bond spread is in line with  expectations, arising from two countries' differing monetary policies,  experts said. The US interest rate hike cycle has caused a quick  increase in interest rates for short-term national bonds, while China is  transitioning from deleveraging to leverage stability by injecting more  liquidity into the market. As a result, its national bond interest rate  is decreasing, they said, adding that the reversal is an outgrowth of  an internal balance, so investors should not overinterpret its role as  an indicator. 

China's  one-year national bonds yielded 2.5080 percent interest while the US'  one-year national bonds yielded 2.672 percent interest as of Nov. 16. It  marks the first time that the China-US national bond spread has  reversed over the past 10 years.

It  is theoretically right to expect a depreciation in the exchange rate  based on the narrowing interest rate, but several factors in China are  preventing the linkage between the two rates, said Shi Mingming, chief  fixed-income analyst at CITIC Securities. First, China's capital  projects haven't completely opened up, which is likely to hinder the  two-way transmission between the interest rate and the exchange rate,  especially the interest rate's effect on the exchange rate. Second,  China's foreign exchange derivatives market need improvement, which will  impede the achievement of a no-arbitrage equilibrium through interest  arbitrage and make the linkage between the interest rate and the  exchange rate less effective in reality, Shi added.

The  narrowing interest rate will not necessarily result in large capital  outflows. US dollar assets represent a global haven, so a large amount  of capital will flood into the US when its national bond interest rate  is rising but the history says it will not necessarily happen, Shi  explained, giving an example that China's foreign trade turnover and  foreign exchange reserve were growing at a high rate and so was China's  gross domestic product from 2002 to 2004 and from 2005 to 2007 when the  China-US national bond spread reversed.

The  level of the economic growth is fundamental for determining capital  flows, so that a government can maintain stability through various means  to ensure the economy can attract capital, Shi stated. At present,  China's economy is growing resiliently and can run healthily and  smoothly so there is no need to worry too much about the impact of the  narrowing interest rate spread on capital outflows.

The  market's concern over the independence of monetary policy is totally  unnecessary, said Liu Yu, chief fixed income analyst at Guosheng  Securities. China is not relying too much on foreign debt, he added. As  of late June, China's short-term foreign debt took up 38 percent of the  foreign exchange reserve, far below the international warning line of  100 percent so China doesn't need to raise the interest rate to retain  foreign capital, and monetary policies should focus more on domestic  factors, Liu added.

Enticing  overseas institutions to buy more yuan bonds based on China's advantage  in the interest rate spread with the US is no longer workable due to  the reversal, other experts said. China Central Depository &  Clearing handled CNY1.4 trillion (USD211.48 billion) in bonds as of late  October, an increase of CNY253 million (USD37.1 million) from a month  earlier but the rate of growth hit a 20-month trough. 

This  shows that foreign-funded institutions have been buying fewer yuan  bonds. It is therefore necessary to attract overseas institutions to  continuously buy more yuan bonds, accelerate the pace of the financial  opening up, promote the yuan's internationalization, create more  opportunities for diversified asset allocation and attract more and more  overseas institutions, the newspaper reported experts as saying.