As investors worry about the deterioration of the Chinese economy and anticipate the future loose monetary policy of the People’s Bank of China (PBOC), China’s 10-year government bond yield has fallen for five consecutive weeks. On Monday, December 2nd, the bond yield dropped to 1.9750%, hitting a new low since April 2002. Experts believe that there is still room for the bond yield to decline in the future.
In the afternoon of Monday, the 10-year government bond yield in China fell by 5 basis points to 1.9750%, while the 10-year government bonds, which move inversely to the yield, rose by 0.4% to close at a historical high.
Additionally, the yields of 30-year government bonds, 5-year government bonds, and 2-year government bonds fell by 3.75 basis points, 4.4 basis points, and 4 basis points respectively, closing at 2.16%, 1.59%, and 1.32%. The 30-year government bond yield was lower than the Japanese government bond yield last month for the first time in 20 years.
Reuters reported that currently, the Chinese 10-year government bond yield is 222 basis points lower than the US government bond yield. The last time the gap was this wide was at the beginning of the century when the global market was recovering from the burst of the dot-com bubble.
For most of the past decade, China’s 10-year government bond yield has been over a hundred basis points higher than US rates. However, after the COVID-19 pandemic in 2022, when the Chinese economy lagged behind the US, the 10-year Chinese government bond yield started to drop below US rates.
Kiyong Seong, Chief Macro Strategist for Asia at Societe Generale, stated, “Although the breakthrough of the 2% mark in the 10-year government bond rate was expected, it happened a bit earlier than anticipated.”
Currently, the market generally expects that the weak economy will prompt the PBOC to further loosen monetary policy, including further reducing the reserve requirement ratio and injecting more liquidity into the market.
According to a report from Bloomberg, Tommy Xie Dongming, Chief Macro Researcher for Asia at OCBC Bank, pointed out on Monday that the rise in Chinese government bonds (resulting in lower yields) is mainly driven by three factors: expectations of reserve requirement ratio cuts, liquidity support, and economic fundamentals.
Bond prices and bond yields have an inverse relationship. When bond prices rise, the cost for investors to buy bonds increases, while the maturity interest remains the same, leading to a decrease in the bond yield for investors.
As early as at the end of September, at the Financial Street Forum, the Governor of the PBOC, Pan Gongsheng, hinted at reserve requirement ratio cuts and interest rate cuts.
He stated that it is expected that before the end of the year, depending on market liquidity conditions, there may be a further reduction of 0.25-0.5 percentage points in the reserve requirement ratio. He also hinted that the 7-day reverse repurchase rate may be cut by another 20 basis points before the end of the year.
Last Friday, the PBOC stated that it injected 800 billion yuan through 3-month direct reverse repurchases, compared to 500 billion yuan in October.
Additionally, in November, the PBOC also purchased 200 billion yuan of government bonds in open market operations.
Reuters reported that Ke Zong, former Portfolio Manager at Mingshi Hedge Fund, said, “The fundamentals (of the Chinese economy) are still very weak. The policies are merely measures to prevent a hard landing of the economy rather than robust stimulus measures.”
Besides domestic factors, there is also the impact of Trump’s high tariff plan and the potential for continued decrease in policy rates.
Strategists at Morgan Stanley stated in a report that besides the outlook for Chinese economic growth, the US may impose tariffs on Chinese imports, which indicates that Chinese bonds are likely to rise next year.
Economists at Morgan Stanley projected that the PBOC may cut policy rates by 40 basis points by the end of the first quarter next year.
About two years ago, due to difficulties in the Chinese real estate sector and a weak stock market, a large amount of funds flowed into banks and the debt market, further accelerating this trend.
Chen Jianheng, Chief Fixed-Income Analyst at Citic Securities, stated in a recent online seminar that loose monetary policy will lower interbank deposit rates and help push the 10-year bond yield down to around 1.7%-1.9% next year.
In fact, on Monday, the interest rate on 1-year AAA-rated negotiable certificates of deposit (NCD) fell by about 10 basis points to below 1.7%. NCDs are short-term debt instruments issued by banks for financing needs and are transferable among institutions.
Liu Youhua, Deputy Director of Wealth Research at Private Equity RRRFinance, told “South Finance News” that although the 10-year government bond yield is currently very low, considering the current economic environment and policy expectations, there is still room for the yield to decline in the future, although the pace of decline may slow down.
In addition to reserve requirement ratio cuts and interest rate reductions, two heavyweight meetings at the macro level are on the horizon: the Political Bureau meeting and the Central Economic Work Conference. During these meetings, the economic plans and growth targets for 2025 will be announced. It is expected that both meetings will take place around mid-December.