China Bond Yields Hit New Lows, May Trigger Capital Outflows and Financial Risks: Experts

People walk outside the Shanghai Stock Exchange building in Shanghai, China, on Nov. 4, 2020. (Hector Retamal/AFP via Getty Images)

News Analysis

As China’s economy slows, investors are pouring money into Chinese government bonds, driving their prices up and pushing yields to record lows.

Consequently, the central bank has been increasing the supply of government bonds but criticized the market for undermining the economy. Experts warn that this move could accelerate capital outflows and lead to the collapse of financial institutions.

Yields on 10-year bonds, which fell to a 24-year low of 2.18 percent in July, have rebounded slightly. However, 20-year and 30-year yields remain near historic lows.

In March, the Chinese Communist Party (CCP) announced the launch of ultra-long-term special government bonds. As the housing market has weakened and economic uncertainty has increased, more funds have flowed into the bond market.

In late April, 10-year bond yields dropped to 2.21 percent, significantly lower than a year ago and more than 1 percentage point below their November 2020 peak.

The 30-year ultra-long-term special government bond, which was first issued on the Shanghai and Shenzhen stock exchanges in late May, was overwhelmed with buy orders on the first day. Both exchanges had to suspend trading, with the Shanghai exchange experiencing two unprecedented suspensions.

This year’s government bonds offer low interest rates, with a three-year savings bond yielding just 2.38 percent, barely above state-run banks’ rates.

U.S. economist Li Hengqing told The Epoch Times that falling bond yields could widen the interest rate gap with the United States, accelerate yuan depreciation, and increase capital outflows. Moreover, market instability could lead to losses or closures for financial institutions heavily invested in government bonds.

Since April, China’s central bank, the People’s Bank of China (PBOC), has issued multiple warnings about a potential bond market bubble. Speaking at a financial forum in June, PBOC Governor Pan Gongsheng warned of a crisis akin to the U.S. Silicon Valley Bank collapse if the bond boom isn’t controlled. Silicon Valley Bank’s failure was triggered by massive withdrawals and a devaluation of its U.S. Treasury investments following Federal Reserve rate hikes.

The PBOC announced its decision to purchase government bonds on July 1. The unprecedented move was meant to increase the supply of government bonds in the market to exceed the demand. By doing so, the PBOC aims to lower the prices of government bonds and keep them within a manageable range, ensuring market stability and preventing potential financial risks.

Market Analysts Pessimistic About China’s Economy

A number of domestic experts have recently expressed pessimism about the Chinese economy.

On July 7, the Shanghai University of Finance and Economics held an economic forum in which its president, Liu Yuanchun, stated that understanding China’s economy requires a comprehensive review of its external environment and internal dynamics. He said a narrow focus on finance or industry alone won’t provide answers.

Mr. Liu said that geopolitics has become the dominant global risk factor, surpassing capital’s influence and fundamentally changing the traditional allocation of economic resources. He noted that the deep adjustments in the real estate sector signal the end of the conventional development model and point to a complete transformation of China’s economic structure. He added that this marks the end of the era of “fiscal revenue from land sales,” requiring adjustments in government revenue sources.

Li Daokui, professor of economics and director of the Institute of Chinese Economic Thought and Practice at Tsinghua University, highlighted his concerns in a keynote speech at the 2024 Seashell Finance Annual Conference on July 3. He stressed that the main problem is that demand lags behind productivity. While technology boosts productivity, an economy cannot thrive on production alone without consumption to match its growth.

Mr. Li warned that without sufficient demand, producers and companies would cut prices and suffer reduced profits, leading to losses, business exits, declining investor returns, and negative impacts on the stock market and bank lending. This would undermine investor confidence and reduce the economy’s growth potential.

Li Hengqing told The Epoch Times that scholars within the CCP system have not addressed the core issues. He believes that the root cause of China’s economic decline is the deviation from a true market economy and the lack of legal protection. Government intervention incurs costs and hampers development; a market economy free of government interference is the way out, he said.

He also stressed the need for a rule-of-law society to win public trust and protect property and intellectual property rights, which would encourage continued investment and development.

“Without these two measures, China’s economy has little to look forward to. The fact that there has been no significant [economic] improvement despite numerous policy measures proves this point,” he said.

Xin Ning contributed to this report.