China’s Bond Market Sends Warning Signals of Economic Uncertainty
China’s bond market has hit a record low, with the yield on 10-year government bonds plummeting to 1.61%, a sign of economic uncertainty. The yield on 30-year bonds has even fallen below Japan’s, a country known for its slow growth and deflation. This suggests a deep skepticism about China’s economic prospects.
The US dollar, meanwhile, is strengthening due to higher interest rates compared to Europe, leading to a rise in the dollar against the euro. Analysts predict the euro could equal the dollar by the end of 2025.
The low yield on 10-year bonds, a drop of over 80 basis points in 2024, is a reflection of a banking system that is flooded with liquidity. With over 300 trillion yuan in deposits and slow credit growth, a large portion of this capital is flowing into money markets and bonds, further depressing yields. Even popular money market funds like Tianhong Yu’Ebao, China’s largest fund with over 600 million investors, have seen record lows in yields.
Banks are faced with the choice of lending to companies or investing in risk-free government bonds. Many are opting for the latter, especially in light of weak demand from households and companies.
The People’s Bank of China (PBOC) is reportedly planning to cut interest rates this year.
The CSI 300 index of mainland China’s stock market fell by 1.18%, extending the previous day’s losses, while the yield on 10-year government bonds hit a new low of 1.598%.
The Euro’s decline to a new low against the US dollar, at 1.0255, is a clear signal from the international currency market. The main reasons are the persistent weakness of the European industrial sector and the expectation that the European Central Bank (ECB) will cut interest rates more sharply than the US Federal Reserve.
While the dollar is supported by the robust US economy, the euro is being weighed down by the weak demand in the eurozone.
This trend could have consequences for China’s economy, as exports to Europe, a major trading partner, may be under pressure.
The outlook for the Swiss franc remains stable to positive, a scenario that could be either a blessing or a curse, depending on the perspective. While analysts at Raiffeisen and the Zurich Cantonal Bank predict the euro-franc exchange rate will be around 0.92 and 0.91 rap respectively in 12 months, the franc is more volatile against the dollar.
A strong dollar, supported by the expected economic policies of the Trump administration, could boost the Swiss export industry in the spring, before the effects wear off by the end of the year.
For the Swiss population, these predictions mean little change in daily life. The benefits of a strong franc, such as cheaper shopping abroad, could be neutralized by the ongoing high inflation in other countries. In the long run, however, the trend towards appreciation is expected to continue, driven by the solid financial situation and economic stability of Switzerland.
China’s economy, meanwhile, is stuck in a phase of stagnation, with low inflation expectations and a population that has little trust in the short-term economic outlook. The developments in China’s bond market are not just a technical phenomenon, but a reflection of the economic reality. For investors and policymakers, the central question remains: what steps can be taken to restore confidence in China’s economy?