Chinese bonds hit historic lows amid economic concerns
Trade war risks, ineffective stimulus stoke deflation fears
By Bahattin Gonultas and Mahmut Cil
BERLIN/ISTANBUL (AA) - Chinese bonds have dropped to historic lows amid growing concerns about the country’s economy, spurred by the potential for a trade war with the US under President-elect Donald Trump’s promised policies. Ongoing deflation worries in China have further exacerbated the risk perception, experts say.
Despite government efforts, China has yet to overcome its deflation challenges. A potential trade war with the US has only added to the economic uncertainty, increasing demand for bonds, typically considered a safe haven.
On Jan. 3, China’s 10-year bond yield hit a record low of 1.58%. The yield in China’s $11 trillion bond market lagged 300 basis points behind the US 10-year bond yield.
Chinese bonds have now fallen to levels lower than those seen during the 2008 global financial crisis and the 2019 pandemic, even though the government has rolled out numerous stimulus packages since September 2024.
Sant Manukyan, manager of International Capital Markets at Türkiye-based IS Investment, told Anadolu that three factors are contributing to the current situation: deflationary pressures, the real estate sector, and economic expectations.
"When we look at the inflation indicators, the producer price index (PPI) or the consumer price index (CPI), we see no serious pressure—we can even say that the PPI is negative and the CPI is holding onto above zero, and the situation fuels expectations for rate cuts from the People’s Bank of China (PBoC) in the coming period," he said.
He added that Chinese households and the private sector are more focused on paying down debt than borrowing for growth.
"Low interest rates are not perceived as borrowing signals, in fact, they are considered to be an opportunity to reduce debts, as they are trying to minimize risk," he explained.
"The expectations that the stimulus packages will not stimulate the economy and the PBoC will issue more cuts lead to the decline in bonds," he added.
Uraz Cay, global market strategist at Istanbul-based Ak Investment, noted that the Chinese economy grew by 5.2% in real terms in 2023, but the growth outlook for 2024 is uncertain.
"A growth of 4.6% was announced in the third quarter, resulting in the questioning of the 5% growth target for 2024," he said, noting that the market expectation was around 4.8% at the time.
He also mentioned that the US dollar/Chinese yuan parity rose from below 7–7.3 in the last quarter of 2024, driven by high debt levels, deflation risks, housing market concerns, and uncertainty due to Trump’s second term.
"It is possible to lessen structural issues while supporting growth via high-tech and increased domestic consumption by emphasizing small and medium-sized enterprises," Cay said.
Cay emphasized that China is unlikely to face a prolonged deflationary period like Japan, given the country’s significant developments in high-tech sectors.
He predicted that China’s 10-year government bond yield could hit 1.4% by the end of 2025.
"As for Trump, will his promise of 60% tariffs on China before the elections be realized, or was it just a bargaining chip? We can't know until it happens," he said.
Cay pointed out that total trade between the US and China amounted to $575 billion in 2023, with Trump’s proposed tariffs—20% or 60%—potentially harming China’s growth targets.
"A 20% tariff would reduce China’s growth by 0.7% according to Goldman Sachs, while UBS estimates a 60% tariff could lead to a 1.5% loss," he said.
"Trump's second term will be the cause of the biggest uncertainties for the next two years for the Chinese economy, and there may be deviations in the 5% growth target for 2025 with the additional tariffs," he added.
Cay also mentioned that the impact of China’s 10 trillion yuan ($1.3 trillion) stimulus package and related capital market support depends largely on the outcome of the tariff negotiations.
"For now, the decline in China's 10-year bond is not a clear entry into a deflation or debt spiral. Risks are there, but political decisions will decide if these risks will decrease," he added.
*Writing by Emir Yildirim in Istanbul
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