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Xi Jinping might be able to muzzle Chinese economists, but the message of the bond market is harder to silence. And right now it’s howling that China is sliding towards a Japanese-style deflationary spiral.
The Chinese 10-year government bond yield has steadied a little in recent days, but it has still dropped ca 42 basis points since the beginning of December, and the long term chart is pretty stark:
However, what really hammers home the Chinese economic predicament is seeing its bond market moves in relation to what is going on in other major bond markets.
The most common comparison is with Japanese government bond yields — naturally, given fears that China is falling into something similar to Japan’s long-run deflationary miasma even as Japan finally emerges from it.
But bond yields everywhere are volatile and rising sharply, even as China’s keep slowly grinding lower and lower and lower and lower.
We didn’t include Japan on this chart as its 10-year government bond yield is still a fair bit lower than China’s, but it too is heading northwards. And Chinese 30-year bond yields are now comfortably lower than Japan’s.
It basically looks like investors (including local ones that dominate the onshore government bond market) in practice have little faith that the various measures that Beijing has announced will be enough.
As Capital Economics’ James Reilly noted earlier this week, with FT Alphaville’s emphasis in bold below:
One factor has been growing expectations among investors for policy rate cuts, given that the latest activity data remain weak and policy measures announced so far seem to have failed to boost growth expectations. This helps explain why short-dated yields have also tumbled, with the 2-year yield now down to ~1.0%.
But as we noted in December when the rally in China’s bond market gathered momentum, the size of the move at the long end of the curve suggests that investors are sceptical that the recent policy shifts will lead to a sustained recovery in China’s growth.
Reilly predicts that the 10-year Chinese government bond yield will slip further to 1.5 per cent by the end of the year. But this seems a bit hopeful at this stage.
Given that China has now been flirting with deflation since 2023 — and the producer price index is already deeply negative) it means that yields are still comfortably positive in real terms. Barring an economic miracle they can and probably should have a lot to fall?
Further reading:
— China’s Japanification (FTAV)
— Chinese leverage has crept up to a new record (FTAV)
— Is deflation really China’s next big export? (FTAV)
