Rising Bond Yields in China Amidst Deflationary Pressures and Economic Uncertainty
China’s bond yields are rising, yet economists warn that deflation concerns may reverse this trend. Commercial banks are offering record-low interest loans to stimulate spending, but credit demand remains weak. The PBOC’s measures and ongoing deflationary pressures indicate that borrowing costs are likely to stay low. Despite these challenges, efforts to boost consumption are a priority for the government amid renewed trade tensions with the U.S.
China’s bond yields are currently experiencing an upward trend; however, economists warn that lingering deflation concerns may soon reverse this increase. In an effort to stimulate spending, Chinese commercial banks have introduced record-low interest loans, yet there remains cautious sentiment regarding an actual economic recovery. Edmund Goh, head of China fixed income at Abrdn, noted that market optimism does not align with economic realities, indicating no definitive signs of recovery as yet.
The recent uptick in bond yields can be attributed to a selloff in government bonds, influenced by measures from the People’s Bank of China (PBOC) to control liquidity. The benchmark 10-year yield has risen over 30 basis points since reaching historic lows earlier this year, illustrating market volatility not seen since December. Despite these changes, economists argue that deflationary pressures may likely keep borrowing costs low in the near future.
Even with cheaper loans available, credit demand remains weak, as evidenced by a significant drop in new household loans. In the first two months of the year, new household loans only totaled 54.7 billion yuan, marking the lowest level for that period in two decades. Analysts predict that borrowing costs, generally influenced by government bond yields, will remain low, with Jason Pang from JP Morgan suggesting monetary policy will stay accommodative.
In addressing economic challenges, China’s banks have responded by offering lower consumption loans, driven by the need to encourage spending amidst uncertainty about income changes. Household savings have surged despite repeated interest rate cuts, indicating a tendency for consumers to save rather than spend. Becky Liu from Standard Chartered speculated that this trend of subdued credit demand may continue, contributing to a likely fall in interest rates.
Beijing’s initiative to boost domestic consumption aligns with broader economic strategies, particularly in light of renewed trade tensions with the United States. Deflationary pressures are becoming apparent, with consumer price inflation recently dipping into negative territory. According to Larry Hu of Macquarie, the prediction indicates that this streak could reflect one of the longest periods of deflation since the early 1990s.
As the Chinese economic landscape continues to evolve, the yuan’s performance is also under scrutiny. Despite recent increases in U.S. bond yields, the depreciation of the yuan has generated discussions regarding its implications on trade. Ju Wang from BNP Paribas noted that a stronger yuan could alleviate some trade tensions, highlighting a nuanced interaction between bond yields and currency values as the market adapts to changing conditions.
In summary, while China’s bond yields are currently rising due to a selloff in government bonds, economists remain skeptical about the underlying economic recovery, citing significant deflationary pressures. Consumer lending activity has not improved substantially, despite the introduction of lower interest loans from banks. The desire to bolster domestic consumption remains a primary objective for the Chinese government, yet achieving a turnaround in consumer confidence will require sustained efforts. As the economic landscape develops, analysts will closely monitor the bond and currency markets for further trends.
Original Source: www.nbclosangeles.com
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