China faces trade, economic challenges with market focusing on potential stimulus moves

As global markets react to ongoing economic pressures, recent developments in China highlight growing concerns over trade tensions and expectations for further stimulus measures. 

China’s 10-year yield fell below the significant psychological level of 2 per cent, reaching a record low as traders increased their bets that authorities would further ease monetary policy to support the struggling economy, Caliber.Az reports per foreign media. 

After declining for five consecutive weeks, the benchmark yield dropped two basis points to 1.9995 per cent. The 30-year yield also fell by four basis points to 2.17 per cent, having dropped below its Japanese counterpart for the first time in nearly 20 years last month.

The growing interest in Chinese bonds comes amid recent data showing a mixed recovery in the world’s second-largest economy, with improvements in factory activity but a persistent housing slump. It also reflects concerns over the potential for rising trade tensions with the US under Donald Trump’s second term.

"The rally in Chinese government bonds was driven by three main factors: expectations of a RRR cut, supportive liquidity conditions, and still weak economic fundamentals," Tommy Xie, head of Asia macro research at Oversea-Chinese Banking Corp., wrote in a note, referring to banks' reserve-requirement ratio.

The People's Bank of China’s increased liquidity support last month, along with net purchases of sovereign bonds, also helped counterbalance the rise in debt supply, he added.

Expectations remain strong that the struggling economy will lead the PBOC to intensify monetary easing, including further cuts to the RRR and injecting more liquidity into the markets, after the stimulus measures introduced in late September.

"The 10-year yields ‘testing 2 per cent to the downside was well expected, but slightly faster than anticipated,’" said Kiyong Seong, lead Asia macro strategist at Societe Generale. "Trump tariff-related headlines will continue to flow seamlessly, but China stimulus headlines will take more time."

The decline in yields could put additional pressure on the yuan, as Chinese bonds now offer lower returns compared to many of their global counterparts, particularly US Treasuries. The offshore yuan dropped to its weakest level against the dollar since July, becoming one of the worst performers in Asia on Monday, following US president-elect Donald Trump's renewed threats to impose a 100 per cent tariff on the BRICS countries over the weekend.

"The reality shows no easy fix to US-China trade disputes," Citigroup economists and strategists said. "A potential 60 per cent universal tariff could be prohibitive for China-US exports."

In another indication of market expectations for lower borrowing costs in China, one-year interest rate swaps fell to 1.53 per cent on December 2, the lowest level since the peak of the Covid pandemic in mid-2020.

Stimulus expectations also appear to be driving stocks higher, with benchmark indexes on the mainland and in Hong Kong both rising for a second consecutive day. The CSI 300 Index closed 0.8 per cent higher, and the Hang Seng China Enterprises Index finished up 0.9 per cent.

By Naila Huseynova