Falling Chinese bond yields signal concern with deflation

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China’s government bond market opened 2025 with a stark warning for policymakers: Without more concrete stimulus, investors expect inflationary pressures to creep deeper into the world’s second-largest economy.

China’s 10-year bond yield, a measure of economic growth and inflation expectations, Record lows It was down 1.6 percent during trading last week and has since held close to that level.

Importantly, the entire yield curve has shifted downward rather than tightening, suggesting that investors are concerned about the long-term outlook and are not just anticipating a short-term drop in interest rates.

“For the long term [bonds]Yields have moved lower and I think that’s because long-term growth expectations and inflation expectations are becoming more pessimistic. And I think that trend will continue,” said Hui Shan, chief China economist at Goldman Sachs.

Falling yields offer a stark contrast to volatile and rising yields in Europe and the US. For Beijing, the decline represents an inauspicious start to the year after policymakers in September launched a stimulus drive Designed to revive the animal spirits of the Chinese economy.

But data released Thursday showed that consumer prices were near flat in December, rising just 0.1 percent from a year earlier, while factory prices fell 2.3 percent, remaining in inflationary territory for more than two years.

China’s central bank last year unveiled policies to stimulate institutional investment in the equity market and announced for the first time since the 2008 financial crisis that it was a “Moderately loose” monetary policy.

An important Communist Party meeting on the economy in December, chaired by President Xi Jinping, Emphasis on costs for the first time Compared to other previously more important strategic priorities such as building high-tech industries.

The shift in emphasis reflects concerns about household sentiment weakened by a three-year property crisis that has made the economy dependent on manufacturing and export booms for growth. Investors are worried about this Strong exports will suddenly slow down US President-elect Donald Trump has vowed to impose tariffs of up to 60 percent on Chinese goods after taking office on January 20.

Citi economists estimated in a research note that a 15 percentage point increase in U.S. tariffs would reduce China’s exports by 6 percent, knocking a percentage point off GDP growth. Growth in China was estimated at 5 percent last year.

More likely than slow growth, however, are inflationary pressures in China’s economy, analysts said. City economists noted that the final quarter of last year was expected to be the seventh in a row in which the GDP deflator, a broad measure of price changes, was negative.

“This is unprecedented for China, with a similar episode only in 1998-99,” they said, adding that only Japan, parts of Europe and some commodity producers experienced such increased inflation.

Chinese regulators are aware of the parallels with Japan on inflation, said Robert Gilhooly, senior emerging markets economist at Aberdeen, but “they don’t seem to act like it, and one thing contributing to the Japanese example is getting smaller and smaller.”

Goldman’s Shan said the central bank has promised to ease monetary policy this year, but just as important will be a big increase in China’s fiscal deficit at the central and local government levels.

How that deficit is spent is also important. For example, channeling it directly to low-income households could have a higher “multiplier effect” than giving it to banks for recapitalization, he said.

Frederic Newman, chief Asia economist at HSBC, said another reason government bond yields were at record lows was that the economy was flush with liquidity. Higher household savings and lower demand for corporate and personal loans have flushed banks with cash that is finding its way into the bond market.

“It’s a little bit of a liquidity trap in the sense that the money is there, it’s available, it can be borrowed cheaply, but there’s no demand for it,” Newman said. “Availability of finance at the margin is diminishing as an effective driver of economic growth.”

Without a strong fiscal spending package, the inflationary cycle can continue, lowering interest rates, reducing wages and investment, and delaying purchases while consumers wait for prices to fall further.

“Some investors lost a little patience here last week,” he said, referring to the bond rush. “It’s still likely we’re going to get more stimulus. But after all the fits and starts of the past few years, investors really want to see concrete numbers.”

Some economists have warned that Chinese bond yields could slide further. Analysts at Standard Chartered said the 10-year yield could fall another 0.2 percentage points to 1.4 percent by the end of 2025, especially if the market has to issue higher net central government bonds for stimulus purposes.