China attracted a significant net capital inflow into its bond and equities markets in April despite US President Donald Trump’s tariff war and can expect more foreign investment in Chinese assets, analysts said.
This stands in contrast to market concerns over soaring Treasury yields and the wave of panic selling that followed Moody’s downgrade of the US sovereign credit rating last Friday.
The contrasting signals from Washington and Beijing highlight changing global investment dynamics, as more investors continue to move away from US dollar assets since Trump launched his global trade war in early April, according to analysts.
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“Weaker US dollar, US bond yield top, China economic recovery ... it’s time for Emerging Markets,” analysts from the Bank of America wrote in a note on Friday, as Moody’s downgraded US sovereign ratings from AAA to Aa1, citing fiscal risks due to increasing government debt.
Yields of 30-year US Treasuries topped 5 per cent during trading on Monday, the first trading day since the downgrade and the highest level since November 2023.
In contrast, China’s State Administration of Foreign Exchange reported a net capital inflow of US$17.3 billion in April from both individuals and companies.
“Foreign investors increased their holdings of [Chinese] domestic bonds by a net US$10.9 billion in April, while foreign investment in domestic equities shifted to net buying in late April,” the forex regulator said in a statement on Monday.
Many investment banks have raised their projections for China’s economic growth, following the 90-day trade truce between Beijing and Washington announced on May 12 and the country’s economic resilience reported in April.
Concerns that China could face persistent capital outflow pressures, following Trump’s “Liberation Day” tariff announcement on April 2, have also been reassessed, while fears over the US economy have intensified.
“One of the most widely acknowledged things in financial markets is the unsustainable path of the US national debt. The big unknown is when it all tips over,” Deutsche Bank analysts wrote in a note Monday.
“Our view is that Liberation Day has likely brought that reckoning forward. The US’s exorbitant privilege – its ability to borrow well below fair value – is gradually eroding.”
Moody’s US credit downgrade, while far from being a surprise, is “another small crack in the edifice”, according to Deutsche Bank.
Moody’s was the last of the three major credit rating agencies to strip the US of its top-tier AAA rating.
The US treasury yields increase, together with the dollar’s continued devaluation, could signal that the “market is losing its appetite to fund America’s deficits and rising financial stability risks”, wrote George Saravelos, Deutsche Bank’s head of foreign exchange research, in a note on Monday.
As the US market battles multiple downward pressures, including trade uncertainties and inflation risks brought by the Trump administration’s policies, investors have increasingly turned to China and other Asian markets for opportunities.
“China has turned up recently,” Larry Tentarelli, founder of the US-based market monitor Blue Chip Daily Trend Report, told Bloomberg on Monday.
“I’m seeing opportunities in China, India, Korea and Taiwan.”
Any setback in trade talks with China would constitute a major risk for US markets in the next three to six months, while the effect of tariffs on inflation has not yet kicked in, Tentarelli said.
On Monday, China’s Ministry of Foreign Affairs urged the US to “take responsible policy measures to maintain the stability of the international economic and financial system and to protect investors’ interests”.
Bank of America analysts noted that “deteriorating US fiscal dynamics are likely to become worse with upcoming US tax cuts” in a note on Monday, adding that the Senate is likely to propose a bill that “adds even more to the deficit than what the House is considering”.
The sweeping tax cut bill would “likely result in annual deficits of seven to eight per cent of GDP over the next 10 years,” according to the note, way above the three-per-cent limit proposed by US Treasury Secretary Scott Bessent.
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