News

By Jiaxing Li, Summer Zhen and Li Gu

HONG KONG/SHANGHAI (Reuters) - Investors in Chinese bonds head for 2025 betting there will be no miraculous recovery in the economy, putting them at odds with an equities market that has wagered on a revival in consumption.

Although China's closed capital account diminishes the 33 trillion yuan ($4.6 trillion) market's worth as an economic forecaster, the signal from ten-year bond yields scraping record lows almost daily and long bonds falling below Japanese yields still shows a deep-set negativity about the outlook.

"The bonds are basically saying that, yes, there is a (stock market) rally out there, but we don't buy this rally for the long term," said Bhanu Baweja, chief strategist for UBS Investment Bank in London.

"Bonds are saying that this is not an earnings-based rally, this is not a reflation-based rally."

A benchmark ten-year yield down more than 80 basis points this year to a record low of 1.78% reflects a banking system overflowing with cash and a market broadly expecting slow growth and hardly any inflation.

Bond prices move inversely to yields and, because sovereign debt is regarded as a safe asset, they are affected by a combination of inflation expectations, interest rates, creditworthiness and appetite for risk in other asset classes.

Since September, as China has cut interest rates and made numerous promises to stabilise financial and property markets, boost economic growth and revive consumption, equity markets have rallied and pushed price-to-earnings ratios sharply higher.

Bonds have made an almost opposite move, particularly at the long end where 30-year yields have been driven below 2%. Thirty-year yields in Japan, an economy which has become a byword for deflation and slow growth, are 2.24%.

"I think the Chinese bond yields should be lower if they were to reflect the current economic situation in the country," said Edmund Goh, investment director of fixed income at abrdn in Singapore.

"We think it's difficult to see meaningful inflation given the property situation in China now and the government is determined not to create another property bubble."

In March, China's government set a growth target of "around 5%" for this year, but the world's second-biggest economy has struggled for momentum and grew just 4.6% in the third quarter.

Goldman Sachs sees growth slowing to 4.5% next year.

LITTLE RESISTANCE

Part of the backdrop to the bond rally is a lack of alternatives. Chinese banks are bursting with more than 300 trillion yuan in deposits and with loan growth in the doldrums, much of that ends up flowing to money markets and bonds - pushing down yields.