With the decline in the Chinese economy, trapped funds continue to pour into the bond market, pushing down yields on Chinese government bonds. The People’s Bank of China is increasingly borrowing national debt to boost supply while criticizing market practices as betting against China’s economy. Experts warn that this could accelerate capital outflows from China and pose risks of financial institution losses and potential bankruptcies.
As demand for 10-year government bonds intensifies, yields in July dropped to 2.183%, the lowest level since 2000, albeit seeing a slight rebound. Yields on 20-year and 30-year government bonds are also hovering at historic lows.
In March of this year, the Chinese authorities announced the launch of ultra-long-term special government bond transactions during the National People’s Congress. With continued weakness in the Chinese real estate market and increasing economic uncertainties, funds have continued to flow into the bond market.
By late April, the yield on 10-year government bonds had fallen to 2.205%, a decrease of about 0.5 percentage points from a year ago, and over 1 percentage point lower than its peak in November 2020.
In late May, the 30-year special government bonds listed on the Shanghai and Shenzhen stock exchanges were flooded with buy orders from their first trading day onwards. The two exchanges had to halt trading, with the Shanghai Stock Exchange experiencing unprecedented dual suspensions.
Chinese government bonds issued this year have relatively low-interest rates. For example, the third series of three-year savings government bonds in 2024 offer an annual coupon rate of 2.38%, just three basis points higher than the three-year fixed savings rate of state-owned banks at 2.35%.
Economist Li Hengqing, a Chinese-American, expressed to Epoch Times that a substantial drop in Chinese government bond yields could widen the gap with the United States, potentially leading to accelerated depreciation of the renminbi and exacerbate capital outflows from China. Additionally, if the market becomes unstable, financial institutions heavily invested in government bonds could face losses or even bankruptcy risks.
Since April, the People’s Bank of China has issued more than ten warnings regarding a potential bursting bond market bubble that could destabilize the financial markets and jeopardize China’s economic recovery.
At a financial forum in Shanghai at the end of June, the Governor of the People’s Bank of China, Pan Gongsheng, warned of a crisis similar to the Silicon Valley bank in the United States if the bond frenzy is not contained.
The Silicon Valley bank was the largest bank in the United States to go bankrupt since the global financial crisis. The bank invested billions of dollars in U.S. government bonds, seemingly a safe investment. However, when the Federal Reserve began raising interest rates to combat inflation, the value of these bonds depreciated. Faced with a massive withdrawal of deposits by customers, the Silicon Valley bank had to sell bonds at low prices, leading to a collapse in market confidence and sparking a run.
The People’s Bank of China is taking unprecedented actions by borrowing bonds. On July 1st, the bank announced that it would conduct “national debt borrowing operations” for selected open market traders in the near future.
Li Hengqing explained that by borrowing government bonds and selling them in the market, the People’s Bank of China aims to oversupply government bonds to control their prices within a manageable range.
Furthermore, a report from the Financial Times on July 13th highlighted the phenomenon of market funds rushing to purchase government bonds.
The report cited experts warning that bond markets do not always rise, with increasing risks of market reversals. Referring to anonymous industry insiders, the report mentioned that buying government bonds implies expecting lower interest rates in the future, essentially betting against the renminbi and the Chinese economy, increasing the pressure for capital outflows.
Several domestic Chinese experts and scholars have recently expressed pessimism about the Chinese economy.
On July 7th, the Shanghai University of Finance and Economics held an economic forum where its president, Liu Yuanchun, emphasized the need to consider external influences and internal logic of the era when discussing the Chinese economy. He noted that geopolitical factors are becoming the dominant force of world risks, surpassing capital forces and fundamentally changing the traditional global economic resource allocation logic. The deep adjustment in real estate signifies the end of traditional development methods, with the Chinese economic structure undergoing comprehensive transformation, indicating the end of the land finance era. The sources of government revenue need to be adjusted as the system is currently undergoing changes.
Renowned Chinese economist and Director of the China Economic and Practical Research Institute at Tsinghua University, Li Daokui, spoke at the opening ceremony of the 2024 Beijing Financial Annual Meeting on July 3rd. He expressed concern that the lack of demand keeping pace with productivity is the most worrying aspect of the Chinese economy. While technology can enhance productivity, an economy cannot solely rely on production without consumption.
Li Daokui stated that without demand, producers and companies must lower prices, leading to reduced profits, causing many firms to incur losses and exit the market, impacting investor returns, affecting the stock market, and banks struggling to loan funds. Lack of investor confidence will discount the growth potential of the future economy.
Zheng Yongnian, former Director of the Institute of International Affairs at the Chinese University of Hong Kong Shenzhen, recently raised questions in a Chinese media interview regarding official actions.
“Why are there fewer Chinese Nobel Prize winners? It’s definitely not a genetic or cultural issue. Why can Chinese people win awards in other countries?” Zheng wondered, noting that many chip producers in the United States are from Zhejiang, China. He urged for institutional reform at the structural level, such as adjustments to regulations, standards, and systems.
Li Hengqing suggested that the scholars within the Chinese regime have not touched upon the fundamental reasons for the continuous deterioration of the Chinese economy. The lack of progress is due to not adhering to market economics and the absence of legal protection.
He pointed out that China is not a market economy, as the Communist regime continues to exert its influence impacting economic development. However, any government intervention incurs costs and increases economic burdens, hindering development. Therefore, government intervention must be reduced, allowing China to truly embrace a market economy instead of the current market under the leadership of the Communist Party.
He added that transforming China into a rule of law society is imperative. Only through becoming a rule of law society can trust be built among the people and safeguard their property and intellectual rights. With these changes, people will invest and engage in development continuously. To become a rule of law society, the narrative of a “ruling rule” must be wholly transformed, and power must be contained.
At present, it seems that neither of these actions have been taken by the Chinese authorities, leaving China’s economy without much to anticipate. “Countless measures have been introduced. Do you see any improvements in the Chinese economy?”