Fed puts pressure on Chinese bond bubble

Beijing briefly suspends trading amid market slide

TRD MIAMI /
Dec.December 16, 2016 12:00 PM

20 renminbi yuan bill shown next to the hills on the bill

From the New York website: Is the Federal Reserve popping the Chinese bond market bubble? The central bank’s Wednesday announcement that it will raise interest rates more aggressively in 2017 caused bond prices in China to tumble.

On Thursday, Chinese authorities briefly stopped trading in some bond futures in a bid to stem the slide. Chinese 10-year government bond yields (which rise as prices fall) hit a 16-month high of 3.4 percent.

“People woke up to the fact that the bond bubble is too large,” Hao Hong, a researcher at BoCom International, told the Wall Street Journal. “The bond market in China is under severe pressure, across the board.”

The Federal Reserve on Wednesday announced an slight increase in the federal funds rate, a benchmark short-term interest rate. That was expected. But investors were surprised by its announcement that it expects three more rate increases in 2017, sending bond prices around the globe tumbling.

Higher short-term rates in the U.S. tend to lead to higher long-term bond yields, which tend to attract more capital from abroad. As more money flows in from countries like China and Britain, bond prices there fall and yields rise.

The British 10-year government bond yield rose by 0.1 percentage points to 1.352 percent Thursday.

The health of the Chinese financial market matters to New York’s real estate industry because of its importance to the global economy, and because Chinese investors have emerged as important investors and lenders in the local market.

The Chinese government has loosened lending and pumped money into the economy in recent years in order to get accelerate slowing growth. But the measures had the side effect of inflating asset prices to levels many analysts consider unsustainable.

The Fed’s rate announcement also highlights a policy dilemma facing Beijing: should it raise rates and restrict lending in order to stem massive capital outflows? Or should it seek to keep rates low in order to stimulate the economy, at the risk of more capital leaving the country? Either way, additional capital controls could be in store. [WSJ]Konrad Putzier


Related Articles

arrow_forward_ios
Daily Digest Miami

Gil Dezer, Related complete Residences by Armani/Casa, hedge funder, wife drop $105M for Palm Beach estate

President Trump, Federal Reserve chairman Jay Powell, and the Federal Reserve (Credit: Getty Images and iStock)

Fed holds interest rates steady amid housing market slowdown

More Americans are choosing not to tap into their home equity

More Americans are choosing not to tap into their home equity

Strong spring real estate season shaping up — but who’s got the advantage?

Strong spring real estate season shaping up — but who’s got the advantage?

(Credit: Pixabay)

Mortgage interest rates dropped last week and may stay down for months

44 EB-5 investors sue PNC Bank over Palm House Hotel losses

44 EB-5 investors sue PNC Bank over Palm House Hotel losses

Pawn shops in China will often lend up to 40 percent of the value of an apartment pledged as collateral (Stock photo, credit: Getty)

Chinese regulators crack down on real estate-backed loans from pawn shops

Bankruptcy judge approves sale of Palm House Hotel for $40M

Bankruptcy judge approves sale of Palm House Hotel for $40M

arrow_forward_ios