Greater China govvies remain on a K-shaped trajectory.Dollar-pegged HKD rates are facing upward pressure from both global and domestic term premia, while CNY rates remain the lower leg of the regional curve.
China: USD/CNH briefly hit a four-year low of 6.704 this week, while 2Y and 10Y CGB yields are hovering around 1.24% and 1.69%, respectively. The combination of resilient external demand and subdued domestic demand reinforces our constructive view on CGBs. Export growth remained elevated at 25.0% YoY in August, while the trade surplus was up 3.2% YoY YTD (see: Exports and liquidity supported CGBs). Meanwhile, domestic demand remains weak, as reflected in the inflation data released yesterday. The modest rebound in CPI and PPI was largely driven by higher oil prices and AI-related products, while demand across the broader economy remains sluggish. This suggests that strong current-account inflows are being absorbed into an already high national saving pool, with household and corporate deposits continuing to reach historical highs.
Hong Kong: Liquidity conditions have eased following the Silver Bond issuance, as reflected in the decline in HKD T+1 forward points, while HIBORs have started to retreat. However, front-end rates should remain elevated this month as we approach quarter-end, while the long end should face further upward pressure. On the domestic front, the Chief Executive is set to unveil Hong Kong’s 15th Five-Year Plan and Policy Address on 16 September. Government bond issuance could accelerate further to finance infrastructure projects in the Northern Metropolis and technology-sector development. Externally, any hawkish surprise from the Fed, BoJ or other major central banks could feed through to dollar-pegged HKD rates. The narrowing negative HKD-USD rate spread is also reducing the attractiveness of HKD carry trades.
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