The yield on China’s 10-year bonds is higher than Australia’s for the first time in at least a decade, a reversal that investors say will boost the yuan against the South Pacific nation’s currency.
China’s benchmark notes yield 3.55 percent, 37 basis points more than similar-maturity debt in Australia, compared with 71 basis points less in March. The average discount since Bloomberg started compiling data on yuan notes in early 2003 is 155. Schroders Plc (SDR) said it cut exposure to Australian dollars in favor of China’s currency, while Commonwealth Bank of Australia said the yuan is a good hedge against volatile global markets.
The yuan has climbed 18.7 percent against the dollar in the past five years, just shy of the 21 percent gain in the Australian dollar, supporting Premier Wen Jiabao’s bid to shift the economy’s focus to domestic consumption from exports. The Aussie rose 0.4 percent this quarter, lagging the yuan’s 1 percent advance, as the Reserve Bank of Australia cut interest rates this week, for the sixth reduction in 14 months.
“Should the yield support become less favorable the Australian dollar could see downward pressure,” Bob Jolly, London-based head of global macro at Schroders, which oversees $327 billion, said in a Dec. 3 interview. “Chinese authorities are expected to gradually move the yuan higher as the economy rotates toward domestic consumption over investment and exports. This may also damp the demand for hard commodities, one of Australia’s major exports.”
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