Chinese bond yields at widest gap with US in more than a decade

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The gap between the US and China’s borrowing costs has grown to its widest level in more than a decade, in a sign of the sharp divergence in the bond market’s expectations for the world’s two largest economies.

Yields on China’s benchmark 10-year government bonds fell 0.05 percentage points to 1.77 per cent on Friday, a new record low following a signal by Beijing that it could lower interest rates. US 10-year bond yields were, meanwhile, up marginally at 4.33 per cent. Yields fall as prices rise.

That widened the gap between the two to more than 2.5 percentage points — the biggest since at least 2011, according to LSEG data. The move reflects concern that China’s economy has entered a deflationary spiral and the belief that US President-elect Donald Trump will enact aggressive fiscal measures to boost the US economy, which could increase its deficit.

“This is the result of US-China decoupling,” said Ju Wang, head of China FX and rates at BNP Paribas, adding that the diverging economic performance of the two countries was partially explained by deglobalisation.

The yield differential also piles further pressure on the Chinese renminbi, which has been weakening due to the country’s economic slowdown and the renewed threat of a trade war with the US under Trump.

A weaker renminbi could add to tensions with the incoming US president. Trump administration figures have previously labelled China a “currency manipulator”.

The Chinese currency has fallen further in recent days after Reuters reported, citing sources, that Beijing was considering letting its currency devalue further to defend its exporters. The onshore renminbi is at 7.28 to the dollar, compared with 7.10 on November 5 — the date of the US presidential election.

The lower yields come after Chinese Communist party officials pledged “vigorous” efforts to boost domestic consumption and lower interest rates to revive the economy.

Longer-dated Chinese yields also fell on Friday, with the 30-year yield down 0.04 percentage points at 2.01 per cent. The two-year yield fell 0.05 percentage points to 1.18 per cent.

“The big picture is that China is adopting a low inflation [economic] model . . . while the US is adopting a looser fiscal policy,” said BNP’s Wang, adding that China’s 10-year yield could fall as low as 1.5 per cent by the end of next year.

The rally in Chinese government bonds has come as investors look for havens amid a long-running sell-off in the stock market.

The Communist party’s politburo, which is led by Xi Jinping, changed its monetary policy stance on Monday to “moderately loose” from “prudent” for the first time in 14 years, in another sign that Beijing is looking to act to stimulate growth.