China's markets, long considered insulated from global ructions due to strict capital controls, took a hit this week from the U.S. rate hike.
Despite the mainland's capital controls, its bond market joined the global market ructions on Thursday after the U.S. Federal Reserve surprised by saying it expected to hike interest rates three times next year, rather than the previously forecast two hikes. The Fed also hiked its benchmark rate by 25 basis points, as was widely expected, to a target range of 0.5 to 0.75 percent, only its second rate hike in a decade.
Analysts expected the bond yields were only headed even higher, despite the controls.
"The capital controls make China's financial markets the least exposed [in Asia] to selling pressure emanating from the U.S. Treasury market, but they're not completely closed off," noted Tim Condon, head of research for Asia at ING.
He expected that a combination of the recent drop in China's currency against the dollar, overall liquidity tightness and the mainland's stronger economic data would send bond yields higher.
China's bond yields climbed, with the benchmark 10-year yield rising as high as 3.346 percent on Friday from 3.233 percent on Thursday. That's up from levels just below 3 percent at the beginning of December. Bond yields move inversely to prices.
Trade in futures for the five-year and 10-year bonds were reportedly halted twice on Thursday – once in the morning session and again in the afternoon – after they fell far enough to breach the 2 percent trading limit.
"I don't think the worst is behind. Yields are going higher," Condon said. "The 10-year has been trading below 3 percent for much of this year. We will look back on that as a deflation trade in same lines as negative yields in Germany and Japan were deflation trades."
Inflation expectations have picked up globally, especially as the U.S. was expected to engage in more fiscal spending. China's producer price index jumped 3.3 percent on-year in November, the fastest pace in five years, while the consumer price index rose 2.3 percent on-year.
Others also expected China's bond yields to rise.
Frances Cheung, head of rates strategy for Asia ex-Japan at Societe Generale, said on Friday that the market was "quite bearish."