Cash return is the best hedge to higher US rates (and lower China rates)

This China Musings note examines the divergence between US and China rate cycles and its implications for Chinese equities. The US economics team expects one more 25bp Fed hike in December before a prolonged pause, with US Treasury yields having reached decade highs, while China's 10Y CGB yield hovers near historical lows after the PBoC cut the PSL rate to support "Six Network" investments. Empirically, US and HK/China equities typically struggle around the start of Fed tightening cycles and resume their uptrend a few months after the initial hikes, but rapid increases in US nominal and real bond yields pose a bigger near-term test, transmitting mainly through valuation and capital-flow channels and hitting offshore China equities harder given much higher foreign ownership. Sector and style-wise, Energy, Banks and to a lesser extent Insurance tend to outperform when US rates rise, with Value, Dividend and cash-return factors proving resilient while non-profit growth and long-duration s