…there certainly are a number of indications that the adjustment in China is intensifying. In interest rate markets the substantial easing in liquidity so far this year, which has seen money market rates fall substantially and longer-term rates ease meaningfully (Figure 5), has not fed through to the credit sector. Single A credits for instance, are still posting yields above 11% despite the five year government bond yield having fallen from 4.6% to 4.0%.
…Certainly some stability – or even strength – in US Treasury yields would likely make regional currencies much more sensitive to China’s ongoing internal adjustment. We may find however, that China’s slowdown is reaching the point where asset markets become sensitive to it anyway.
China is the one place in the world where spreads on corporate debt are hitting new highs, not new lows. That’s a recipe for a sudden reversal if ever I’ve seen one!
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
