A quarterly series of Fed rate hikes does not mean the PBoC will be forced to push up interest rates. We believe the PBoC will aim to keep the deleveraging process on track by not moving in lock-step with the Fed's 25bps quarterly hikes.
The interest rate differential between 10-year Chinese government bonds and US Treasuries is likely to continue to shrink. We expect the differential, whihc is currently 100bps, to fall to 70-80bps in the coming six months.
The spread of Chinese 10y bonds over UST 10y bonds fell consistently and rapidly through 2018 to reach a low of 39bps on 19 October.