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Yields on China’s long-term government bonds have fallen below Japan’s for the first time, as investors bet that the world’s second-largest economy will be mired in the deflation that has long plagued its neighbor.
A rise in 30-year Chinese government bonds has pushed yields to 2.21% on Friday from 4% at the end of 2020 as the Chinese government cuts interest rates to shore up the struggling economy and Chinese investors flock to haven assets. decreased.
Japan’s long-term government bond yields, which had remained below 1% for years, have risen above China’s 2.27% as the Japanese government normalizes monetary policy after decades of deflation.
The crossover in yields comes as Chinese authorities struggle to maintain yields as they warn that a sudden reversal in markets could threaten broader financial stability.
But some investors believe deflation is too entrenched in China’s economy to be easily corrected through fiscal and monetary policy, meaning yields will have to fall further. are.
John Woods, Asia chief investment officer at Banque Lombard Odier, said: “The trend in Chinese government bonds is inexorable and yields are going to fall,” adding that it is unclear how authorities can rein in deflation. I don’t know,” he added.
“China will continue to be in a low-yield environment and may continue to be in a low-yield environment,” he said.
Some investors believe that certain conditions in China’s economy mirror those seen in Japan in the 1990s, when the bursting of the real estate bubble led to decades of stagnation.
China’s core inflation rate, which excludes fuel and food, was running at an annualized rate of 0.2% as of October. In Japan, the core inflation rate reached 2.3%, the highest level in six months, strengthening the case for further interest rate hikes.
President-elect Donald Trump’s pledge to raise tariffs on Chinese exports to the United States by 10 percentage points is also seen as a threat to growth.
Zhenbo Hou, emerging market sovereign strategist at RBC BlueBay Asset Management, said China’s monetary policy “will remain accommodative for some time to come,” even if housing and stock market stimulus temporarily pushes yields higher. There is a high possibility that the situation will remain as it is.
“Nineties Japan is still a strategy,” he added.
The Chinese government has long been battling the “Japanification” of its economy, investing heavily in high-tech, green and electric vehicles with the goal of boosting long-term growth.
Authorities have recently intervened in the sovereign debt market to push up long-term bond yields, warning local banks of a long-term debt “bubble” that could lead to a liquidity crisis in the financial system.
Analysts at Goldman Sachs wrote in July that “some (Chinese) policymakers appear to view falling long-term yields as a sign of weak domestic growth and inflation expectations, and this pessimistic It seems like he wants to push back on his emotions.”
However, deflationary pressures have only intensified this year, and weak economic indicators have led to increasing calls for large-scale economic stimulus measures to boost the economy.
Despite the biggest financial stimulus package since the coronavirus pandemic and a 10 trillion yuan (about $1.4 trillion) fiscal package, domestic investors are lagging behind in China’s battered stock and real estate markets. Bond yields continue to fall as investors look for alternative investments.
“This is consistent with the new reality in global financial markets due to US-China decoupling and deflationary risks in China,” said Zhu Wang, chief China currency and rates strategist at BNP Paribas. “The rest of the world faces inflation risks . . . and there is not enough demand for spare capacity in China.”
Many investors believe the government needs to do more to change the structure of the bond market.
“Unless consumption increases and investment decreases, it will be difficult to escape deflationary pressures,” said Andrew Pease, chief investment strategist at Russell Investments. “This is a major policy shift for (Beijing).”
