Chinese Bonds Complete Worst Month in Year as Yuan Extends Loss

Chinese sovereign bonds posted their the steepest monthly loss in a year amid speculation authorities will refrain from easing monetary policy after the U.S. signaled higher borrowing costs as early as next month. The yuan fell by the most this month since the August devaluation.

The yield on 10-year government bonds climbed nine basis points since the end of April to 2.98 percent in Shanghai, the highest level since December, ChinaBond data show. The yuan fell 1.6 percent this month to 6.5846 per dollar as of 4:50 p.m. in Shanghai, bringing losses in the second quarter to 2.1 percent. Federal Reserve Chair Janet Yellen said on Friday higher interest rates in the coming months look “appropriate.”

The possibility of a U.S. rate increase this summer is raising concern that China’s capital outflows could worsen. The People’s Bank of China said in an article published in China Business News last week that it will create a neutral and appropriate policy environment for structural reform, after the People’s Daily earlier this month cited an “authoritative person” as signaling the economy won’t return to the heady growth of the past.

“Various signals sent by policy makers indicate that there will be no more massive easing and the economic expansion may experience ‘L’-shaped growth,” said Xu Yuehong, an analyst at Bank of Communications Co. in Shanghai. “This is adding pressure to the market, as the pending U.S. interest-rate decision continues to be the major external risk that will directly affect the currency, which in turn could bring tightening pressure to onshore liquidity.”

A Bloomberg replica of the CFETS RMB Index has risen 0.05 percent this month to 97.15, after falling for five months in a row.

— With assistance by Helen Sun

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