The yield spread between US and Chinese bonds has widened to the highest level in over a decade. Analysts believe that this is a result of the decoupling between the US and China, indicating significant market divergence in expectations for the two largest economies in the world.
On Friday, December 13th, the yield on US 10-year Treasury bonds rose slightly to 4.33%, while the yield on Chinese 10-year government bonds fell 0.05 percentage points to 1.77%, reaching a historic low.
According to data from the London Stock Exchange, the yield spread between US and Chinese bonds has exceeded 2.5 percentage points, the largest difference since 2011.
Analysts suggest that this reflects concerns about China’s economy falling into a deflationary spiral, while the market has raised expectations for President-elect Trump to implement proactive fiscal measures to boost the US economy.
Wang Ju, Head of China Foreign Exchange and Interest Rate at BNP Paribas, stated, “This is the result of US-China decoupling. The overall situation is that Beijing is adopting a low inflation economic governance model…while the US is pursuing a more expansionary fiscal policy.” She anticipates that by the end of 2025, the yield on Chinese 10-year bonds could drop to a new low of 1.5%.
The historic high in the yield spread between US and Chinese bonds could further weigh on the Renminbi exchange rate. Due to China’s economic slowdown and Trump’s promises of imposing high tariffs on China during the election campaign, the Renminbi has been depreciating recently.
Conversely, Renminbi devaluation could escalate tensions with the incoming Trump administration. During his first term, Trump labeled China as a “currency manipulator.”
Peter Navarro, nominated by Trump as White House Trade and Manufacturing Policy Chief for the second time, stated on Thursday that the Treasury Department under Trump will not readily accept China’s currency manipulation.
Reports from Reuters and other media outlets suggest that the Chinese authorities are considering allowing further devaluation of the Renminbi by 2025 to counter potential tariff measures by Trump.
The onshore Renminbi to US dollar exchange rate is currently at 7.28, compared to 7.10 on the US Presidential Election Day (November 5th).
To stimulate the Chinese economy, heavily impacted by the severe real estate crisis, the top Chinese leadership convened a rare meeting this week, promising to amend monetary policy, “vigorously” stimulate domestic consumption, lower interest rates, and revive the economy.
Analysts from Morgan Stanley stated that investors do not believe that the recently announced Chinese monetary easing measures will boost the economy.
They explained why, despite previous commitments to further loosen monetary policy, the yield on Chinese 10-year bonds hit a new low for the year.
Longer-term Chinese bond yields also saw declines on Friday, with the 30-year bond yield dropping 0.04 percentage points to 2.01%, and the 2-year bond yield falling 0.05 percentage points to 1.18%.