Can China use widening yield gap between the US dollar and yuan to boost global role?

The 10-year US Treasury yield was 5.22 per cent on Thursday, compared with 1.69 per cent for Chinese government bonds on their first trading day after the National Day holiday – a gap of about 3.5 percentage points, compared with a record 3.7 percentage points on September 9.

Jiang Zhenlong, an associate research fellow at the Chinese Academy of Social Sciences’ Institute of Finance and Banking, argued that higher US yields weaken the appeal of yuan assets and add pressure on the exchange rate and capital flows, but also raise dollar funding costs.

“The China-US yield inversion presents an asymmetric effect: pressure on the asset allocation side and benefit on the financing side,” he wrote in the latest issue of China Money Market, a central bank-affiliated magazine.