China’s slowing economy has prompted investors to flock to Chinese government bonds, causing their prices to rise and yields to hit record lows. In response, the central bank has increased the supply of government bonds, but this move has been criticized for undermining the economy. Experts warn that this could lead to capital outflows and the collapse of financial institutions.
Yields on 10-year bonds reached a 24-year low of 2.18 percent in July, though they have rebounded slightly since then. However, yields on 20-year and 30-year bonds remain near historic lows. The launch of ultra-long-term special government bonds in March has further attracted funds into the bond market as the housing market weakens and economic uncertainty grows.
The demand for government bonds was evident when the 30-year ultra-long-term special government bond was first issued in May. It received overwhelming buy orders, leading to trading suspensions on both the Shanghai and Shenzhen stock exchanges. This surge in demand for government bonds is due to the low interest rates they offer. For example, a three-year savings bond yields just 2.38 percent, only slightly higher than rates offered by state-run banks.
Economist Li Hengqing warns that falling bond yields could widen the interest rate gap with the United States, accelerate yuan depreciation, and increase capital outflows. He also points out that market instability could result in losses or closures for financial institutions heavily invested in government bonds. The People’s Bank of China (PBOC) has issued warnings about a potential bond market bubble since April. PBOC Governor Pan Gongsheng even compared the situation to the collapse of Silicon Valley Bank in the US, emphasizing the need for control over the bond market boom.
To address the growing demand for government bonds and stabilize the market, the PBOC announced its decision to purchase government bonds on July 1. This move aims to increase the supply of government bonds to surpass demand, thereby lowering their prices and ensuring market stability.
Market analysts have expressed pessimism about China’s economy. Liu Yuanchun, the president of the Shanghai University of Finance and Economics, highlighted the need for a comprehensive review of China’s economy, considering its external environment and internal dynamics. He emphasized that geopolitics has become a dominant global risk factor, causing significant changes in the traditional allocation of economic resources. Liu also noted that the real estate sector’s deep adjustments signal the end of the conventional development model and the need for transformations in China’s economic structure.
Li Daokui, a professor of economics at Tsinghua University, raised concerns about the lagging demand in China’s economy. He stressed that while technology boosts productivity, an economy cannot thrive without matching consumption. Without sufficient demand, producers and companies may cut prices, leading to reduced profits, business exits, and negative impacts on the stock market and bank lending. This could undermine investor confidence and hinder the economy’s growth potential.
Li Hengqing believes that the root cause of China’s economic decline lies in its deviation from a true market economy and lack of legal protection. He argues that government intervention incurs costs and hampers development, and a market economy free of government interference is essential for growth. He also emphasizes the importance of a rule-of-law society to protect property and intellectual property rights, encourage investment, and foster continued development.
In conclusion, as China’s economy slows down, the demand for Chinese government bonds has increased. However, this surge in demand has raised concerns about potential capital outflows and the stability of financial institutions. The central bank has taken steps to address these issues by increasing the supply of government bonds. Nevertheless, market analysts express pessimism about China’s economy, highlighting the need for comprehensive reviews and addressing underlying structural issues such as lagging demand and lack of legal protection. To ensure long-term economic growth, China must focus on fostering a true market economy and establishing a rule-of-law society.
