(Yicai Global) April 12 -- Foreign capital outflows will be limited and manageable after the yield spread between Chinese 10-year government bonds and comparable US Treasuries reversed yesterday for the first time in almost 12 years, Economic Daily reported, citing market insiders.

The temporary inversion will not prompt capital flight or exchange rate risks, and it will be unlikely to set obvious constraints on China's monetary policy, the sources said, according to the report.

The yield on US 10-year Treasury bonds rose 5.5 basis points to 2.76 percent yesterday, while that on China’s 10-year bond remained at 2.75 percent. It was the first time since June 2010 that US government debt had offered a better rate, as the US Federal Reserve begins to ratchet up interest rates.

Given the low percentage of foreign investors in China’s stock and bond markets and the real yield after factoring out inflation, large-scale withdrawals of foreign capital are not expected, said Lou Feipeng, a researcher at Postal Savings Bank of China.

Recent net outflows have mostly been due to escalating geopolitical tensions, according to Bai Xue, an analyst at Golden Credit Rating International. The inflow of overseas portfolio investments will remain the general trend, he said.

Bai said any pressure for exchange rate depreciation from the narrowing spread is limited, as data show that since China’s exchange rate reforms in 2015, the correlation between the change in China-US spread and shifts in the yuan against the US dollar is very low.

The US experiences inflation once every 40 years, while price increases in China are relatively mild, said Guan Tao, global chief economist at Bank of China Securities. US monetary policy is focused on damping down inflation, while China’s policy is aimed at supporting stable growth, which is the main reason for the narrowing yield spread, he said.

“Since the beginning of the Covid-19 pandemic, there have been significant differences between the two countries in terms of the pace of economic recovery and inflationary trends, which have led to a divergence in monetary policies,” Bai said. “With these preconditions, the narrowing or even inversion of the bond yield spread between China and the United States is inevitable to a certain extent.”

The spread had already flipped on bonds of different maturity, Economic Daily pointed out. On March 25, the yield on US three-year bonds was 8 basis points higher than comparable Chinese notes for the first time in 13 years. On April 1, the two-year Treasury spread was inverted by as much as 16 basis points.

Editor: Futura Costaglione