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

The widening gap between Chinese and American government bond yields, now at 3.17 percentage points, is unlikely to cause a significant capital flight from China, according to investment executives at Marsh Investment. This record spread is primarily attributed to US fiscal pressures and global macro trends, rather than a structural retreat for Chinese assets.

US 10-year Treasury yields have reached their highest level since 2023 at 4.85 per cent, while China's 10-year yield remains at 1.68 per cent. Marsh Investment's global chief investment officer, Niall O’Sullivan, stated that while high US yields are attracting attention, they are not a major factor compared to other forces driving market movements.

O’Sullivan pointed to global supply-demand imbalances, US national debt, and heavy corporate borrowing as key drivers of the elevated long-term yields. The widening yield gap has sparked debate about the potential for "de-dollarisation" but Marsh Investment's executives remain skeptical. Reserve-currency status, they argue, requires decades of financial infrastructure to build, and no alternative currently matches the dollar's liquidity and scale.

Instead of fleeing mainland assets, global borrowers and tech firms are diversifying their funding sources by issuing offshore yuan "dim sum" bonds to lower overall capital costs. While Chinese authorities have increased oversight of cross-border transactions and offshore earnings, Marsh Investment expects cross-border flows to remain resilient in the long term, as fundamental demand will continue to support the market.