The gap between benchmark borrowing costs in the US and China has reached its widest level ever, threatening to accelerate a shift in capital flows between the world’s two biggest economies. The spread between 10-year bond yields in the US and China rose to a record 3.17 percentage points on Thursday as their economies faced divergent inflation outlooks. The 10-year Chinese government bond yield stood at 1.68 per cent, while the equivalent US Treasury yield reached 4.85 per cent, its highest level since 2023.

Higher Treasury yields, which translate to lower bond prices, are likely to stoke capital outflows that Beijing is rushing to contain. "The risk is that if interest rate differentials become wider and wider then that will draw capital away from China," said Mansoor Mohi-uddin, chief economist at Bank of Singapore. Chinese bond yields have been grinding lower as the country grapples with a chronic lack of credit demand and deflationary pressures from slowing economic growth. "You can call China the most profitable and successful bond market in the world among major benchmarks, possibly for the wrong reasons," said John Woods, chief investment officer for Asia at Lombard Odier. "Prices are rallying hard largely because of underlying disinflation and economic conditions." Meanwhile, yields in the US have been climbing over concerns about the country’s growing debt pile and on expectations that the Federal Reserve will begin raising interest rates in response to inflationary pressures. Treasury yields jumped to their highest levels in almost three years on Wednesday after Treasury secretary Scott Bessent’s $6bn buyback plan disappointed investors.

Low Chinese bond yields have led to an explosion in offshore renminbi borrowing as multinational companies and foreign governments take advantage of the low rates to borrow cheaply, boosting Beijing’s attempts to increase global use of its currency. But the relatively higher Treasury yields could add to capital outflow pressure. Chinese authorities have stepped up efforts this year to collect taxes from overseas capital gains and have scrutinised the Hong Kong-based insurers and brokerages that mainland Chinese residents often use to move savings offshore.

Last month, China raised the quota for domestic institutional investors to invest overseas by $6.8bn, in a move analysts said was aimed at reducing outflows through unofficial channels. "They want to make sure it’s happening within the supervised channels," said Winnie Wu, head of Asia-Pacific equity strategy research at Bank of America Global Research. Bank of Singapore’s Mohi-uddin said the outflow pressure on China was unlikely to be severe because of concerns over debt sustainability in the west. "The fiscal deficits in democracies are too high," he said. "There’s no political will to reduce deficits through increased taxation or lower spending. That’s a major concern.".