Is China the Source of Higher US Long Rates?

Apollo Chief Economist

Maybe China is behind the rise in US long rates. Growth in China is slowing for cyclical and structural reasons, and Chinese exports to the US are lower. As a result, China has fewer dollars to recycle into Treasuries. In fact, China has been selling $300 billion in Treasuries since 2021, and the pace of Chinese selling has been faster in recent months, see charts below and the presentation available here.

If slowing growth in China is a source of higher US rates—together with the US sovereign downgrade, Fed QT, Japan YCC exit, and rising US Treasury issuance—then a bad US employment report on Friday may not result in dramatically lower rates.

The bottom line is that the cost of capital will likely stay permanently higher for reasons that have little to do with the business cycle, and it was the period with essentially zero interest rates from 2008 to 2020 that was unusual.

China has sold $300 billion in Treasuries since 2021, including $40 billion since April 2023
Source: Bloomberg, Apollo Chief Economist
Diverging growth trends in the US and China
Source: Bloomberg, Apollo Chief Economist
China: Exports are slowing
Source: Bloomberg, Apollo Chief Economist
China real estate index in recession territory
Source: NBS, Haver, Apollo Chief Economist. Note: A reading above 100 indicates economic growth and a reading below 100 indicates a slowdown in China’s real estate market.

Home price-to-income ratio five times higher in Shanghai than in New York
Source: Numbeo, Apollo Chief Economist. Note: Price to Income Ratio is the basic measure for apartment purchase affordability. It is generally calculated as the ratio of median apartment prices to median family disposable income, expressed as years of income.
China: In 2000 there were 10 workers per retiree. Today there are 5.
Source: UN, Haver, Apollo Chief Economist
Outlook for China

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