Macroscope | Why the plunge in China’s bond yields is not bad news

For those who believe China is succumbing to the chronic deflation and stagnation that plagued Japan following the bursting of its asset bubble in 1990, the recent moves in China’s government bond market provide further evidence of the “Japanification” of the world’s second-largest economy.

On December 2, the yield on China’s benchmark 10-year government bond dipped below the psychologically important 2 per cent level for the first time, taking its decline since February 2021 to 1.3 percentage points. In January 2018, China’s 10-year bond was close to 4 per cent.

Yet it is the crossover of Chinese and Japanese long-term bond yields that provides the strongest ammunition for proponents of the Japanification thesis. On November 29, the yield on China’s 30-year debt fell below its Japanese equivalent for the first time.

The symbolic milestone in Asian sovereign bond markets says as much about China as it does about Japan. Historically low yields in China reflect persistent economic weakness and expectations of looser policy while higher yields in Japan indicate rising inflation and the prospect of a normalisation in policy.

It also comes at a critical time in China’s markets. The “anywhere but China” trade that prevailed for nearly four years began to unwind in September when Beijing announced more forceful stimulus measures. The CSI 300 index of Shanghai and Shenzhen-listed shares is up 22 per cent since September 23, making Chinese and Hong Kong equities two of the best-performing asset classes this year.

However, China’s bond yields resumed their decline after a brief surge. Many analysts believe the government missed an opportunity to come up with a more comprehensive and bigger stimulus package designed to tackle the underlying causes of deflation. “At some 12 trillion renminbi [US$1.7 trillion], this [fiscal stimulus] is nothing to sneer at. But because this money is primarily devoted to swapping out existing debt, rather than lift demand, the direct boost to growth in the near term is probably limited,” HSBC said.