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China’s government bond market 2025 opens with a stark warning for policymakers: Without more decisive stimulus, investors expect inflationary pressures to become more entrenched in the world’s second-largest economy.
China’s 10-year bond yield, a measure of economic growth and inflation; It fell to a low level During last week’s trading, it was less than 1.6 percent and has since been close to that level.
Crucially, the aggregate yield curve has shifted downward rather than downward, suggesting that investors are pleased with the long-term outlook and are not just waiting for short-term cuts to interest rates.
“For the long-term[bonds]the yields are coming down, and I think that’s going to make long-term growth prospects and inflation prospects more pessimistic.” And I think this trend is likely to continue,” said Hui Shan, Goldman Sachs’ China chief economist.
Falling yields provide a stark contrast to volatile and rising yields in Europe and the US. Falling for Beijing in September represents an embarrassing start to the year after policymakers He started driving provocatively China’s economy is designed to revive the animal spirit.
But data released on Thursday showed that consumer prices remained flat in December, up from a 0.1 percent increase a year earlier, while factory prices fell 2.3 percent, remaining in deflationary territory for more than two years.
China’s central bank last year announced policies to stimulate investment by institutions in the equity market, and announced the implementation of the project for the first time since the 2008 financial crisis. “Moderately loose” monetary policy.
An important Communist Party economic summit chaired by President Xi Jinping in December; Emphasized consumption for the first time Other already important strategic priorities, such as building high-tech industries.
The shift in emphasis reflects concerns about household sentiment weakened by a three-year property crisis that has left the economy dependent on manufacturing and export growth. Investors are worried about this race Strong exports will suddenly decrease US President-elect Donald Trump has pledged to impose tariffs of up to 60 percent on Chinese goods since taking office on January 20.
Citi economists estimate that a 15 percent increase in U.S. tariffs would reduce China’s exports by 6 percent, a percentage point off GDP growth. Growth in China was estimated at 5 percent last year.
More insidious than slow growth, analysts say, are deflationary pressures in China’s economy. Citi economists said last year’s final quarter was expected to be the seventh in a row in which gross domestic product was negative for price changes.
“This is unprecedented for China in 1998-99,” he said, noting that only Japan, parts of Europe and some commodity producers experienced such prolonged price cuts.
China’s regulators are aware of the parallels with Japan in deflation, said Robert Gilhooly, senior emerging markets economist at Aberdeen, but they don’t seem to be, and one factor contributing to Japan’s example is that it’s easing little by little. He said.
According to Goldman’s Shan, the central bank has promised to ease monetary policy this year, but as necessary, there will be a large increase in China’s fiscal deficit at the central and local government levels.
How that deficit is resolved will also be important. Direct transfers to low-income households, for example, can have a greater “multiplier effect” than giving to other sectors, such as banks, she says.
Frederic Neumann, HSBC’s chief Asia economist, said another reason why government bond yields have hit record lows is that the economy is flush with liquidity. High household savings and low demand for corporate and individual loans have left banks hungry for cash flowing into the bond market.
“It’s a bit of a liquidity trap in the sense that money is there, it’s available, it can be borrowed cheaply,” Neumann said. “Financial facilitation at the margin is becoming an effective driver of economic growth.”
Without a strong fiscal spending package, the deflationary cycle could continue, with interest rates falling, wages and investment slowing and consumers postponing purchases as they wait for prices to fall.
“Some investors have gotten a little impatient here in the last week,” he said, referring to the rush to bonds. “It’s still going to be where we get a lot of stimulation. But after the ups and downs of the past two years, investors want to see concrete numbers.
Some economists have warned that the slide in Chinese bond yields could fall further. Analysts at Standard Chartered said the 10-year yield could fall another 0.2 percentage point to 1.4 percent by the end of 2025, especially if the market has to absorb higher net supply of central government bonds for stimulus.
