China's Bond Market Screams Deflation as Yields Plunge

China's bond market is sending a stark warning about the country's economic prospects, with yields plummeting and signaling deflationary risks, as reported by Financial Times.

The 10-year government bond yield has stabilized somewhat recently but is still down roughly 42 basis points since the beginning of December, depicting a worrying trend. The FT highlights that this move is particularly concerning when compared to other major bond markets.

"The most common comparison is with Japanese government bond yields – naturally, given fears that China is falling into something similar to Japan's long-run deflationary miasma even as Japan finally emerges from it," the report states. While bond yields are generally volatile and rising globally, Chinese yields continue to decline steadily, indicating a lack of investor confidence in Beijing's ability to stimulate the economy.

The FT points out that Chinese investors are deeply skeptical about the effectiveness of the government's announced policy measures. "The size of the move at the long end of the curve suggests that investors are sceptical that the recent policy shifts will lead to a sustained recovery in China's growth," notes James Reilly of Capital Economics, as cited by the FT.

Reilly predicts that the 10-year Chinese government bond yield could fall further to 1.5% by year-end. However, with China already experiencing deflation since 2023 and producer prices deeply negative, even this prediction suggests that yields would remain positive in real terms.

Despite recent policy announcements aimed at boosting the economy, investor skepticism persists. "It basically looks like investors (including local ones that dominate the onshore government bond market) in practice have little faith that the various measures that Beijing has announced will be enough," the report concludes.