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Why China’s convergence trade may not be so harmonious in 2019

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Are the glory days over for the China convergence trade? The world is in turmoil, investor perceptions are in disarray and cosy notions about Chinese interest rate and bond yield convergence to the United States are open to question. Chinese yield spreads over the US are so wafer thin, further narrowing may be pushing the boundaries of risk-reward credibility. China’s government bonds may be a novel diversification opportunity for investors, but perceptions of “fair-value” might have reached the end of the road and spread divergence may be the next step for investors.

This isn’t good news for China’s renminbi and is a potential problem for an economy still dependent on valuable inflows of funds from abroad to help supplement domestic funding requirements. At a time when China’s domestic credit expansion has been slowing, it’s also not the best news for growth. Global economic uncertainties are rising, leaving China’s economy and currency stability more vulnerable.

What convergence bulls look for most in global markets is robust outperformance. Looking at the state of play in China’s bond and equity markets right now, there is not much to get pumped up about. Interest rate and yield convergence plays look spent, China equity market prospects have faded,........

© South China Morning Post