Economists cited by the media argue that the latest rise in Chinese government bond yields should not be characterized as a sign of reflation, as ongoing deflationary pressures are expected to be a contributing factor to interest rates remaining low.
The highly intensive sell-off of an Asian country’s government bonds has been the reason for the increase in yields in recent weeks. The People’s Bank of China drained liquidity from the money market to stabilize the yuan. DeepSeek’s sudden success in the artificial intelligence industry was a factor that prompted funds to invest in stocks.
The benchmark yield on 10-year Chinese government bonds rose by more than 30 basis points after historic lows in January. Last week, the corresponding indicator reached the so-called psychological level of 2%. This reading has not been observed since December.
Edmund Goh, head of China fixed income at Abrdn, said that market optimism is outpacing reality. The expert also noted that so far there is no clear signal that the economic system of the Asian country, which is the second-largest in the world, is out of the woods.
Currently, China is experiencing such a negative circumstance as the downward dynamic of consumer sentiment, which is approaching record lows. Also in the Asian country, demand for loans from households and corporations continues to be weak.
Data released by the People’s Bank of China shows that in the first two months of the current year, new household loans totaled 54.7 billion yuan ($7.5 billion). Larry Hu, chief China economist at Macquarie, noted that the mentioned indicator is the lowest for the specified period over the past two decades. The expert also drew attention to the fact that this reading signals a fading housing market recovery.
Jason Pang, Asia fixed income portfolio manager at JPMorgan asset management, suggests that borrowing costs in the world’s second-largest economy will be lower over the long term. Interest rates typically move in tandem with government bond yields.
In the context of expectations that the monetary policy of the central bank of the Asian country will remain accommodative, the asset manager is overweight Chinese 10-year government bonds as a tariff hedge, assuming that yields will range from 1.65% to 2%.
Currently, there is a kind of tendency in China, in which local commercial banks seek to gain customers through loans with record-low interest rates. In this case, financial institutions demonstrate that they have taken into account the call of Beijing as a political center to stimulate lending. Currently, residents of the Asian country prefer to sock away money, as the prospects for income growth remain shaky and a prolonged market downturn eroded household wealth housing market.
Household savings in China have more than doubled relative to the figure recorded in 2018, reaching about 151 trillion yuan in 2024. It is worth noting that the corresponding tendency is observed against the background of the fact that banks in an Asian country have repeatedly cut deposit rates. In the first two months of the current year, household deposits in China increased by 6.13 trillion yuan.
The National Financial Regulatory Administration last week called on banks in the Asian country to expand the issue of personal consumer loans and set reasonable credit limits and interest rates.
Data from the Rong360 Digital Technology Institute shows that in China, several regional banks have doled out cheap consumer loans with interest rates of up to 2.58%. It is worth noting that in May 2022, the corresponding figure was above 4.36%.
Becky Liu, head of China macro strategy at Standard Chartered Bank, said that loan rates will likely fall further as credit demand remains subdued. It was also noted that deflationary pressures continue to deepen. Becky Liu said that by the end of the current year, the yield on 10-year government bonds will be 1.4%. According to the expert, the corresponding forecast is because the People’s Bank of China continues to ease monetary policy to bolster economic growth.
This year, the central authorities of the Asian country have made increasing domestic consumption one of the main political priorities. This is because China is actually starting to get involved in a new trade war with the United States after US President Donald Trump returns to the White House. A tariff confrontation is already underway between Beijing and Washington. New tariffs on Chinese goods, imposed by the administration of Donald Trump, have already affected the growth of an Asian country’s exports. In January-February 2025, the corresponding indicator increased by 2.3% year-on-year. At the same time, the consensus forecast of experts interviewed by the media predicted that Chinese exports would grow by 5% over the specified period.
Consumer price inflation in the Asian country in February was in the so-called negative territory for the first time in a year. Price producer deflation in China has persisted for more than two years.
In the first two months of the current year, core inflation in the Asian country, which does not take into account such volatile items as food and energy, increased by only 0.3%. Larry Hu predicts that China will face the longest deflationary streak since 1993.
Frederic Neumann, chief Asia economist at HSBC Bank, said low interest rates alone are not enough to spark a revival in consumer lending. It was also separately noted that to achieve the mentioned goal, an upturn in trust is needed, which can only occur gradually.
Most of the wealth of Chinese households is accounted for by property. At the same time, the real estate sector, which has suffered significantly from the prolonged crisis, is still trying to find a floor. In February, new home prices in the Asian country fell by 4.8% year-on-year. The volume of investment in real estate development in China in the first two months of 2025 decreased by 9.8% compared to the figure recorded in the same period of 2024.
The rally in the United States government debt this year triggered a drop in yields. The relevant process is related to concerns about the impact of the tariff policy of the Donald Trump administration on the situation in the US economic system, which is showing a slowdown. Against this background, the gap between the United States bond yields and those on the corresponding Chinese debt narrowed.
The main source of the yuan’s weakening was the outflow of capital to the US, where bond yields were higher. The positive pressure on the Chinese currency eased against the background of recent market movements, as a result of which the yield of United States bonds fell against the background of an increase in the corresponding indicator in the Asian country.
The yield gap between China’s 10-year government bond and the US 10-year Treasury note, while narrowing to a three-month low, was still significant at 230 basis points as of last week, according to LSEG data.
Ju Wang, head of Greater China FX & rates strategy at BNP Paribas, said the risk of a strong yuan is in the near term. In this context, the Federal Reserve’s plan to scale back the bonds it holds on its balance sheet and the rising yield of long-end Chinese bonds was mentioned. According to the expert, this may partially weaken the friction in trade, as the market will come to realize that Beijing is not only refraining from devaluing the yuan, despite the US 20% tariffs on goods from the Asian country but also allows for some moderate strengthening of the currency.
In recent weeks, the offshore yuan has regained its position against the dollar after hitting a 16-month low in January. Last week, the mentioned currency was trading at 7.2478 against the dollar. Since Donald Trump’s victory in the United States presidential election in November, the yuan has weakened by more than 2%.
Since September, the People’s Bank of China has kept its benchmark 7-day reverse repo rate unchanged. The corresponding figure is 1.5%. The Asian country’s financial regulator is taking actions that do not match preliminary expectations that it would lower borrowing costs to stimulate the world’s second-largest economy. At the same time, officials of the People’s Bank of China have repeatedly signaled plans to further ease monetary policy in 2025. However, so far these intentions have not become actions.
Last week, the Fed left the cost of borrowing unchanged. The People’s Bank of China also made a similar decision in the past week. The Asian country’s financial regulator held the 1-year loan prime rate at 3.1%. The 5-year loan prime rate was kept at 3.6%.
Larry Hu said that if the Chinese economy continues to slow down or the Fed blinks, expectations of lower borrowing costs will resume, which could trigger a new drop in bond yields.
