Record China-US gap in bond yields unlikely to trigger capital flight: Marsh Investment

The widening gap between China's and the United States' bond yields is unlikely to lead to a significant capital flight from China, according to investment executives at Marsh Investment. This record spread, which reached 3.17 percentage points this week, is primarily attributed to the US fiscal pressures and global macro trends rather than a structural retreat for Chinese assets.

The 10-year US Treasury bonds yield hit 4.85 percent, their highest level since 2023, while China's 10-year yield stood at 1.68 percent. Although the widening gap has raised concerns about capital being drawn away from Chinese assets and affecting the yuan's value, Marsh Investment executives downplayed the risk during a media briefing on Thursday.

Niall O’Sullivan, global chief investment officer at Marsh, stated that the risk of capital flight is not a major concern compared to other forces at play, such as global supply-demand imbalances, expanding US national debt, and heavy corporate borrowing, particularly in tech and artificial intelligence sectors. The investment team also expressed skepticism about the yield gap contributing to the dollar's loss of dominance in global finance or accelerating de-dollarization.

They argued that achieving reserve currency status requires extensive financial infrastructure, which no alternative has yet established. Instead, global borrowers and tech companies are adapting to high US borrowing costs by diversifying their funding bases, such as issuing offshore yuan "dim sum" bonds to reduce overall capital costs.

Despite increased Chinese oversight of cross-border transactions and offshore earnings, Marsh Investment anticipates that cross-border flows will remain robust in the long run, with fundamental demand continuing to support the regional market even as temporary market turbulence passes.