China bond yields fall to worrying levels

Bonds / news

A bond bubble is developing in Chinese financial markets and regulators are scrambling to contain it and defuse the underlying causes

6th Jan 25, 3:25pm by David Chaston

The Shanghai financial district

Regular readers will know that we have been tracking the fall in Chinese government bond yields for some time.

But in the past few days, the retreat has gathered steam. And that is worrying Chinese regulators.

A bond bubble situation has developed in Chinese financial markets. Regulators have been cautioning market participants not to make the situation worse, but so far fear of market losses is trumping the fear of Beijing regulators.

And it is getting quite serious now, as the following graphic displays show.

Reuters is reporting that the Peoples Bank of China officials are upping the pressure and calling in fund managers for counselling far more frequently now. They have been having these meetings for quite a while, but the intensity and urgency is rising and they are happening a number of times a week now.

In a real sign of extreme bearishness on the Chinese economy and stubbornly entrenched deflationary pressures, bond yields up to the 3-year tenor are trading below the short-term policy rate, the 7-day repo rate at 1.75%.

Although the central bank has warned of zero tolerance towards bond market "misbehaviours" in the past, those warnings have gone unheeded.

Authorities are battling some big problems. Not only has the commercial real estate market essentially failed, that has triggered wider economic confidence problem, not the least of which is the health of their banking system because banks are the front line of policy pressure to help the real estate sector. The pall of bad loans is now a 'rumour', often denied, that has investors seeking the safety of sovereign bonds.

It is the foreign-owned financial media reporting these trends - Bloomberg, Reuters, the FT, and Dow Jones - with most of the local financial media quite silent about these stresses.

And that is just the start. Equities have been falling hard (and that is despite official pressure for banks to now lend for share market purchases, a previously banned activity). The effect of impending new tariffs from the US is feared as well. And official efforts to stop the yuan depreciating is quite undermined by the bond bubble. It's is a trifecta+1 of structural financial problems.

How will this affect New Zealand? Probably only obliquely at this stage. Our interest rate signals still come from Wall Street. But Wall Street could get spooked by the China situation. And a misfiring China will make for an uncertain customer for our exports. It is certainly a risk that is rising and deserves our watching attention. Our morning briefing will bring the updates to this tricky situation.

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64 Comments

by IT GUY | 6th Jan 25, 3:38pm 1736131108

Yes making it even harder to double our exports in the next 10 years......

Lower NZD for sure, as people rush to USD safety

by J.C. | 6th Jan 25, 4:17pm 1736133476

Lower NZD for sure, as people rush to USD safety

In 2024, China was a net seller of U.S. Treasuries. Throughout the year, Chinese investors significantly reduced their holdings of U.S. government debt amid ongoing geopolitical tensions and economic considerations.

https://www.usmart.sg/news/7219995896560386176

As an aside, analysts noted that the PBoC was reluctant to pay elevated prices for gold, which had increased by approximately 33% year-to-date amid various geopolitical tensions and economic uncertainties, including the Federal Reserve's rate-cutting cycle and the U.S. presidential election.

https://www.vietnam.vn/en/gia-vang-tang-ca-map-trung-quoc-tiep-tuc-noi-…

by IT GUY | 6th Jan 25, 5:43pm 1736138580

If a Chinese banking crisis occurs it will trigger a world wide rush to safety....even without Chinese flows

by J.C. | 6th Jan 25, 6:25pm 1736141118

If a Chinese banking crisis occurs it will trigger a world wide rush to safety....even without Chinese flows

You mean a run on Chinese banks by domestic customers? If you're suggesting a flight to USD like in the Asian Financial Crisis, then yes. Remember much debt across Asia is denominated in USD.

As of 2022, the total outstanding U.S. dollar credit to emerging Asia and the Pacific economies was reported to be approximately $1.4 trillion, which accounted for about 37% of total dollar credit to all emerging market economies.

https://www.adb.org/sites/default/files/publication/683416/ewp-634-us-d…

By why would it occur? Banking crises are simply papered over these days (no pun intended). Even in the mighty US in 2023.

by ChrisOfNoFame | 6th Jan 25, 6:44pm 1736142293

Take care, J.C. The vast majority of Chinese won't be able to indulge in a 'flight to safety'. Most will still be there at the 'end' to pick up the pieces.

by J.C. | 6th Jan 25, 7:10pm 1736143831

The vast majority of Chinese won't be able to indulge in a 'flight to safety'.

Compared to who? You could say that the majority of the world's popn is in the same boat. If the mighty USD is the be-all-and-end-all, then the US should be promoting USD-backed stablecoins. Stablecoins are often used for capital flight, allowing users to move assets out of China without triggering regulatory scrutiny. This is particularly appealing in an environment where capital controls are stringent.

https://www.chainalysis.com/blog/east-asia-cryptocurrency-market-2020/

by Baywatch | 7th Jan 25, 5:37am 1736181441

Yes they will, just not how you think they will.

by mark_a | 6th Jan 25, 6:13pm 1736140417

Get the popcorn in for 2025 re the China economy.

I feel a movie coming on re this in the next year or so - “the Big Short 2”

by Threecents | 6th Jan 25, 9:31pm 1736152306

This ZH article (for subscribers) suggests otherwise, their article pulls info from a Goldman report.

https://www.zerohedge.com/commodities/china-secretly-buying-massive-amounts-gold-10x-more-officially-reported-goldman

And while we wait for the thesis to play out, one aspect of the Goldman forecast is already playing out: according to the bank nowcast of central bank and other institutional gold buying on the London OTC market (report available here to pro subs), October saw central banks buy a whopping 64 tonnes in October (vs. pre-2022 average of 17 tonnes), with China once again the largest buyer adding 55 tonnes, which is striking since the official number reported by the PBOC was one-tenth that, or just 5 tonnes. In other words, China is secretly buying up ~10x more gold than it admits

by ChrisOfNoFame | 6th Jan 25, 6:58pm 1736143133

IT GUY : "Lower NZD for sure, as people rush to USD safety"

Lower NZD? You mean even lower than now? Maybe. But it'll be short lived. Take care.

by Dgm | 7th Jan 25, 10:54am 1736200452

A couple of years ago, China was untouchable and unbreakable.. today they are collapsing... all started with the collapse of their housing market

Lessons for the rest of the world

by Grattaway | 7th Jan 25, 1:16pm 1736209016

More than 10 years ago China was building cities with no one living in them - that was the start of the lesson

by J.C. | 6th Jan 25, 4:42pm 1736134930

And a misfiring China will make for an uncertain customer for our exports. It is certainly a risk that is rising and deserves our watching attention.

Important to remember that China is a price setter not price taker for Aotearoa exports like milk powder. They wear the trousers in more ways than one.

by Pa1nter | 6th Jan 25, 5:43pm 1736138601

Big customers have more leverage, yeah.

by J.C. | 6th Jan 25, 6:29pm 1736141397

Leverage can be used in supply relationships for sure P.

As China reduces its imports while simultaneously increasing domestic production, this can lead to excess supply in other markets. This oversupply can drive down global dairy prices as producers worldwide rely heavily on the Chinese market for sales.

by Rumpole | 8th Jan 25, 10:47am 1736286433

So do big suppliers - milk products store - hunger is instant - what do hungry people do - ask Marie Antoinette,

by Squishy | 6th Jan 25, 6:06pm 1736139975

The CCP are being obstinate about this but the answer is probably cheques in the mail if they want to stimulate demand/inflation. Unless they want to allow a clearing/write down of LGFV debt which will be...extremely disorderly.

by Wrong John | 6th Jan 25, 6:18pm 1736140710

Something like this has been coming for more than a decade imo. Watching their real estate market boom year after year, knowing that they already had enough houses for everyone [and some] almost that long ago, I remember thinking at the time that this may not end well, knowing we had our horse tied to the same corral as they did. And looking across the other side of the Pacific, they have their own version of a printing ponzi scheme in action. West or east, it doesn't matter that much imo. We're cooked either way.

by Rumpole | 8th Jan 25, 10:48am 1736286527

please change your name to John Right.

by Davo36 | 6th Jan 25, 6:25pm 1736141144

Yeah a bit of a worry if it all blows up. But China has looked very shaky for a long long time now. The government always just bails everyone out. As in the west.

So it's hard to know if there can ever really be a reckoning of high real estate and bond prices.

by J.C. | 6th Jan 25, 6:32pm 1736141573

The government always just bails everyone out. As in the west.

Yes indeed. I think the typical Chinese pays more attention to this than Aotearoans and our Anglosphere brethren. I think they're more attuned to possible implications.

by ChrisOfNoFame | 6th Jan 25, 6:49pm 1736142545

"The government always just bails everyone out. As in the west."

You couldn't be more wrong. Wait and see. Sure, some bailouts. But far, far fewer than the west.

by J.C. | 6th Jan 25, 7:06pm 1736143593

You couldn't be more wrong. Wait and see. Sure, some bailouts. But far, far fewer than the west.

Historically, China's government has intervened in the banking sector during crises. For instance, in the late 1990s and early 2000s, Beijing bailed out its "Big Four" banks due to a surge in non-performing loans. The government established asset management companies to absorb bad debts and recapitalized banks using public funds. These interventions were crucial in stabilizing the financial system and facilitating rapid economic growth thereafter.

In addition to direct capital injections, China has utilized asset management companies to manage bad debts from banks. These AMCs were initially created to handle NPLs from major state-owned banks, effectively acting as a buffer for toxic assets. More recently, local AMCs have started playing a significant role in resolving issues for smaller regional banks facing financial strain due to deteriorating asset quality.

https://www.euromoney.com/article/2cea8uqckf3chnz8r2qyo/opinion/shengji…

by ChrisOfNoFame | 6th Jan 25, 7:33pm 1736145212

J.C., if you expect to gain credibility on this subject, you need scale (and outcome as who owns what after the event).

by Pa1nter | 6th Jan 25, 9:09pm 1736150956

If you ever desire credibility full stop, you need to do a bit better than posting how everyone else is a dumb-dumb, then running away when someone asks you to substantiate your intellectual prowess.

The tail wags this dog hard.

by Baywatch | 7th Jan 25, 5:39am 1736181571

That's rich

by Pa1nter | 7th Jan 25, 7:48am 1736189322

I critique ideas over people, and will happily elaborate on anything I claim.

This can be a challenging concept for those who can't separate ideas and thoughts from any notion of the self. They fall into character denigration, over addressing the subject at band. But you wouldn't know anything about that, right?

by ThoughtsAndTorts | 7th Jan 25, 7:50am 1736189428

What were the preconditions and background of industrial revolution that occurred in Western Europe in the 17th and early 18th centuries? And use examples of comparative history to demonstrate why it occurred in Western Europe and not somewhere else.

I know you have strong opinions on this, let's see if you'll plant a flag. Provide sources too, be curious to see which Hindu nationalist sites you refer to. And I'm happy to provide the sources (with direct links) I used to reach my conclusions.

by Pa1nter | 7th Jan 25, 7:53am 1736189615

Hmmm, I'm back at work and you're asking for a longform essay.

Highlighting all of those preconditions and backgrounds is quite a task.

Let's start with influences of having colder and variable climates on intelligence and innovation, and the ramifications of having so many kingdom states sharing a limited amount of land area.

by ThoughtsAndTorts | 7th Jan 25, 8:03am 1736190181

Maybe I have misread you Painter.

Last we spoke on this your thesis seemed to be "the industrial revolution and the wealth that flowed from it was a result of the colonisation of India and theft". If you've abandoned that ahistorical position, then I apologise for assuming you hadn't.

I'm more asking for the actual sources you based that conclusion from. I referred you to the work of Fernand Braudel and Carlo Cipolla as two major heavywieghts in this area, so curious to hear what you actually read to form your opinions.

The colder climate hypothesis doesn't hold up particularly well imho, too many counter examples where people in hot climates advanced much more rapidly than those in cold. The fractured states hypothesis seems somewhat more likely as a contributing factor.

by Pa1nter | 7th Jan 25, 8:10am 1736190657

Last we spoke on this your thesis seemed to be "the industrial revolution and the wealth that flowed from it was a result of the colonisation of India and theft". If you've abandoned that ahistorical position, then I apologise for assuming you hadn't.

I never held it. Part of my claim was that Western affluence over the past few centuries was resultant of holding much of the world to ransom at gunpoint and exploiting it.

I'll see if I can dig up the colder climate hypothesis for you. It's fairly well referenced, including even currently observed variables in intelligence relative to climate. Note it's an observed trend, and not an absolute rule. Sometimes you get good Caucasian sprinters also.

by Baywatch | 7th Jan 25, 7:50am 1736189433

I follow the data and science...and can disregard my ego..

by Pa1nter | 7th Jan 25, 7:54am 1736189647

Much of your counter arguments involve some sort of ad hominem, over reasoning or logic. So you forgot humility and honesty as traits.

by Baywatch | 7th Jan 25, 8:05am 1736190330

No I don't - and unlike you I don't strive to be the smartest person in the room.

by Pa1nter | 7th Jan 25, 8:12am 1736190773

You definitely do, and I definitely don't. I just have a fairly high bar for a persuasive view.

by Baywatch | 7th Jan 25, 8:15am 1736190924

The bar keeps rising for one particular topic you are struggling with.....

by Pa1nter | 7th Jan 25, 8:33am 1736191987

The lack of distinction between a bubbled asset and it's inherent qualities and properties?

by Colin Maxwell | 7th Jan 25, 2:22pm 1736212978

With all due respect, Davos36, you are comparing Chinese apples, so to speak, with the Wall Street centered 'Big Apple’, when the two financial models are huge poles apart.

The situation is entirely different when a country deploys its central banking model as a public utility. China has become a massive creditor nation largely because of this factor, and because of the natural corollary, their avoidance of massive public debt and debt to the global private banking cartel. Their debt and money creation mechanism is a domestic issue where the debt owed is denominated in their own currency, controlled through public banks, and not through private monopoly commercial banks.

In this way China taxes economic rent and unearned income with it being part of the production process itself. Subsequently, the rent-seeking private sector is left out in the cold whilst the domestic labour force develops its productivity. Like it or not, this is how China increased its GDP something like 27-fold whilst creating almost negligible destructive inflationary forces. The massive development of the real economy in providing huge increases in available goods and services took care of this, by using simple supply and demand forces in a thriving new market economy.

You also make the mistake of assuming that… "The government always just bails everyone out.”

IMO this is patently false. In fact China has a policy which encourages genuine entreprenuers, but where the risk takers are under no illusions that if they end up insolvent or bankrupt there will be no government bail-outs. Quite the contrary - the government takes no part in this and recognises that the remnant assets still exist within the economy, that they remain available for the private sector to mop up as they see fit, and to deploy where useful into new start-ups or other new or existing projects.

This concept is the very foundation that the Chinese economy has been built on - “let 1000 thousand flowers blossom” or words to that effect, and those that are the brightest serve as models for other entities to aspire to. This is why if you worked out the true productive GDP of China by weeding out the paper shuffling, the truly productive GDP portion would be multiples of the US economy.

Success stories like car maker BYD* are a product of old syle industrial capitalism, where for one success like this (the modern day equivalent of Ford in the early 20th century) where for every Ford success there were dozens of other companies that simply didn’t make it - they were not bailed out - instead their remnants were gobbled up by the market forces of the day.

*(Tesla has a market cap of $1.319 trillion - against BYD’s of $103 billion - almost 13x that of BYD - if that’s not a perfect illustration of casino-capitalism run-a-muck, then I don’t know what is)

Today BYD employs over 900,000 people of which more than 104,000 are involved in R&D alone. They are not not easing off nor resting on their laurels.

This rejuvenated industrial capitalist model is not in the least bit novel - neither is it China’s model - it's actually the best parts of early Western-based industrial capitalism being re-deployed, but now within China's post communist, Confucius, free-market, capitalist/socialist model.

My 2 cents worth - take the legacy media’s depiction of China’s perpetual and impending financial doom with a sack of salt - this has been their parroted prediction for decades. All of the figures that I can find, point to precisely the opposite scenario.

2025 promises to be the test case for the Western fiat casino FIRE (Finance, Insurance, Real Estate) model - in my book that's a very apt label.

Colin Maxwell

by rastus1 | 7th Jan 25, 1:22pm 1736209328

thanks ..as interesting comment.

by ChrisOfNoFame | 6th Jan 25, 6:47pm 1736142448

Just quietly ... This 'event' is being read all wrong. Take care.

But it's likely to be a wonderful opportunity for the wise. But again, take care.

by M0ralHazard | 6th Jan 25, 6:43pm 1736142189

What is your take on this event then, Chris?

by ChrisOfNoFame | 6th Jan 25, 6:46pm 1736142382

Sorry. Can't disclose that.

by Fegus Woodward | 6th Jan 25, 7:22pm 1736144536

Why bother posting then?

by ChrisOfNoFame | 6th Jan 25, 7:41pm 1736145690

Some will pause and think it through. The wise would have been preparing yonks ago.

But yeah - others will 'exercise their rights to free speech'. To be honest - I really don't care what fools do. Sorry.

by Fegus Woodward | 6th Jan 25, 8:04pm 1736147062

OK mate.

by ChrisOfNoFame | 6th Jan 25, 8:23pm 1736148192

You want advance advice? Be ready to pay for it. I guess you're not? Right?

by IT GUY | 6th Jan 25, 8:56pm 1736150171

Chris has a plan so cunning you could pin a tail on it, and call it a weasel.

by Pa1nter | 6th Jan 25, 8:25pm 1736148307

Why bother posting then?

Misanthropy is a hell of a drug.

by Zwifter | 6th Jan 25, 8:45pm 1736149530

Well English is pretty much the only thing I failed at school so I had to Google that one.

by ThoughtsAndTorts | 6th Jan 25, 8:57pm 1736150253

Chris doesn't even understand basic concepts like decimalisation.

https://www.interest.co.nz/economy/131381/financial-markets-reassess-th…

by

ChrisOfNoFame

| 30th Dec 24, 10:54am

"The shift to fiat from harder money led to the financialisation of other assets."

No. Most people with knowledge in this subject would disagree with you.

This started when 'trickle down theory' politicians started to remove regulations on what banks could do. As banking regulations have got progressively weaker and weaker, the banks have been able to create more and more money by securitizing more and more. It wouldn't have mattered whether money was 'hard' or 'soft', the banks would have found a way to do this, e.g. even 'hard' money can be traded in ever decreasingly smaller units.

Note that last part about "ever decrasingly small units". This is like saying one apple cut into 100 slices is more than the same apple cut into 10 slices.

Probably better to talk in mysterious oblique statements rather than be specific considering the above.

by Colin Maxwell | 7th Jan 25, 3:54pm 1736218443

The vey same person, T&T, who had to ask on this forum, what the difference between money and credit is. I kid you not.

by IT GUY | 6th Jan 25, 8:21pm 1736148113

Be prepared to buy offshore (not in china) owned assets as they scramble....

by ChrisOfNoFame | 6th Jan 25, 8:24pm 1736148244

That may be unwise. Take care.

by MacroView | 6th Jan 25, 8:38pm 1736149124

When major commercial banks start buying government bonds (instead of lending on property), it's time to run for the hills.

by IT GUY | 6th Jan 25, 8:44pm 1736149443

Chinese property is so overvalued it makes ours look cheap

by IT GUY | 6th Jan 25, 9:19pm 1736151584

Opinion Chinese economy

China’s bond market is sending a signal policymakers can’t ignore

The country’s central bank is concerned about anaemic domestic demand

https://www.ft.com/content/3bc293c7-7f3b-4aed-affe-ae5cca5e496a

by Rumpole | 8th Jan 25, 10:58am 1736287128

Its puzzling why Chinese govt Bond returns are so low unless its true that China is suffering deflation big time.

by J.C. | 6th Jan 25, 11:35pm 1736159707

Barry Naughton, leading expert on China’s economy and its transformation over the last half century. Barry talks about Japan spending almost a decade trying to painlessly restructure a financial system that had suffered a huge reduction in the value of its assets. And now China seems to be repeating some parts of that.

I like the way you put it. It’s a question, in financial slang, of deciding who gets a haircut and how much — and China hasn’t done that. The only thing they’ve done is try to say, no haircuts for people who prepaid for their housing units, we should try and guarantee delivery for them. That’s politically a good idea, but it’s also the politically easy policy.

What is much harder is deciding who gets forced into bankruptcy, who gets bailed out, and who pays what costs in the process. The best practice is to force some of the early, worst case, bad actors into bankruptcy, but then in order to restore confidence, provide financial support to the better firms. China had the chance to do this with [collapsed real estate developer] Evergrande, but it never did put it decisively into bankruptcy, and instead just let it bleed to death. And despite the supposed existence of a “white list,” it’s never provided believable support to private real estate firms. As a result, nobody’s expectations in the real estate sector can be stabilized, and there’s a huge overhang of unsold property, especially outside the biggest cities, Beijing, Shanghai and Shenzhen. Although there’s been some stabilization recently, it’s hard to believe that the housing sector is anywhere near returning to health.

https://www.thewirechina.com/2025/01/05/barry-naughton-on-the-state-of-…

by mikekirk29 | 7th Jan 25, 6:56am 1736186190

Housing equity destruction in China is v underestimated and not understood in its impact. It is a lead weight dragging their economy over a cliff. Their market value is $72trillion. Bad loans are total unknown

Bond market has no confidence in recovery of housing market or in what bank exposure is. The Chinese debt to GDP is over 300% and based on opaque local government land sales. It is a house of cards and drag on NZ market should not be unappreciated as it is.

Bond market also v concerned about USA debt and its endless acceleration which means they want higher risk premium. Hence talk of more than half a % cut there or here is dream land

by MacroView | 7th Jan 25, 9:42am 1736196135

Agree. The effects of their over-indebtedness are now serious and widespread. Economies perform much like other economic units. When you have too much debt, you must use your cash flow to pay creditors, and so unless you employed the debt productively (so that it generates cash flow) you have a net detriment. China has failed to deploy the vast sums of capital they borrowed over many years productively enough and much of it not at all.

by Independent_Observer | 7th Jan 25, 10:31am 1736199086

A common consensus I found talking to people about the NZ housing market over the past 10-15 years was that it will remain strong unless things turn bad in China - including from a well known/respected financial advisor/author I was in correspondence with.

Well things have turned bad in China - if people think it’s back to the good old days of years or decades of 7% returns on property - I personally can’t see it (but then again this past bull run lasted years longer than I expected it to..)

by mark_a | 7th Jan 25, 11:12am 1736201574

2025 - 2030 prediction: Houses will be back to a place to live in and secure your stuff, not a way to make a (tax free) living.

Thats good for NZ long term, but if you arrived late in to this, you might be left holding the bag unfortunately.

Lets all work on innovative ideas of things the rest of the world wants to buy from us and grow the real economy.

by NZGecko | 7th Jan 25, 1:02pm 1736208127

Well said and agree MA. NZs 40 year property bullrun ended dead, stopped in 2021, and now in a multiyear reverse, to end at the bottom of around 3 to 4xDTI.

Good news for NZ!

by Rumpole | 8th Jan 25, 11:04am 1736287484

Its always supply/demand - NZ high immigration was the demand and supply was under resourced and plagued by obstructionist bureacratic drongos, when net migration from NZ occurs the chickens will come home to roust and feathers will fly!! Be ready to collect some very interesting and valuable feathers.