Since the start of the year, we have seen that the annual change in China Total Social Financing (TSF) 12 Sum has been shrinking rapidly, which could eventually become a problem for risky assets. Previous periods of sharp contraction in China TSF (i.e. 2018) have been associated with a sudden rise in risk-off assets such as USD or US Treasuries. Figure 1 shows that the annual change in China TSF 12M Sum fell from over 10tr CNY in October to 3.1tr CNY April.
Interestingly, we can notice that that a contraction in Chinese ‘liquidity’ has usually been followed by a fall in US long-term bond yields. For instance, figure 2 shows the 6M change in US 10Y Treasury yield with the 6M change in China 12M sum (8M lead). According to this chart, the consolidation the US 10Y yield has just begun.