Impacts of Chinese Economic Reforms

In recent weeks, China has announced a series of economic reforms, many of which will have broad implications for the global financial marketplace moving forward.  For the U.S. bond market, the most direct impact may be felt with the loosening of the exchange rate band between the yuan and the dollar. President Xi Jinping, after a meeting of the Communist Party leadership last week, reiterated a goal to make the yuan fully convertible.  The central bank will effectively end daily foreign-exchange intervention to broaden the yuan’s trading band, People’s Bank of China Governor Zhou Xiaochuan wrote in a book after the party plenum.  According to Bloomberg, China’s foreign-exchange reserves surged $166 billion in the third quarter to a record level. “It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the PBOC, said in a November 20 speech.  These actions ultimately mean less demand for U.S. Treasury bonds, creating a technical void in the market moving forward.  It isn’t clear what will make up for this lack of demand, which could put pressure on Treasury prices over the long term.