The Chinese ten-year bond deepens its historical profitability drop and breaks the 2% barrier. The return to maturity of Chinese sovereign debt has never before had so little appeal. However, the price of these bonds, which moves in the opposite direction to profitability, offers benefits for investors who bought these debt securities on January 1 and which would rise to 10.9% so far in 2024.
The history of China in recent years is summarized in a real estate crisis and in the efforts of the state central bank (PBOC) for supporting the economy, the debt market and its currency: the yuan. And all these efforts have resulted in a ten-year bond that plummets to historic lows while longer-term debt offers signals to the market that the Asian giant’s economy is in the process of recovery. japanization.
Chinese ten-year bonds cross the 2% milestone as a result of a market reading that the country’s monetary policies will continue with easing and cutting interest rates in the hope of seeing a quick recovery. This dynamic has been maintained during the last five weeks where the yield on the ten-year national debt was lower in the secondary market. “The yields on these bonds below 2% were something we expected, but it has been slightly faster than anticipated,” said Société Générale’s Asia macro strategist Kiyong Seong.
The liquidity injections and state stimuli promised by national authorities were met in November with the Republican victory and with Donald Trump’s promise to start with another tariff war against China. This also plays against efforts of the People’s Bank of China to ensure the recovery of the economy. For the moment, it is not expected that the PBOC will stop its monetary flexibility, despite the fall that the yuan accumulates in 2024 and that they could let it fall even more to cushion the blow of a tariff war and thus favor exports.
For now, the provincial governments of the Asian giant took advantage of the drop in financing costs, with this ten-year bond at historical minimum returns, to carry out new issues. In the last two weeks, debt securities worth 720,000 million yuan (99,600 million dollars at the exchange rate) were placed, being the two weeks with the highest sales of Chinese debt of the year and 15% of the total amount issued so far. going 2024.
However, the favorable environment for placing debt in the market may turn against the Chinese central bank if the country does not show signs of recovery in the coming years. “We must not lose sight of the fact that fiscal measures provide support in the short term, but in the long term they will translate into a higher public debt negatively affecting its credit quality,” commented Bankinter.
The drop seen in the return of Chinese bonds in the shortest terms will continue in 2025, according to analysis firms. From the Asian investment bank Citic they hope that the Ten-year sovereign debt falls to 1.6%-1.8%which would further expand the benefits from the price change of these titles over the next year.
To date, an investor could gain 10.9% from the rising price of Chinese bonds. At some point in 2024, this gain became higher. However, the The most conservative investor would not find a greater benefit in investment grade government bonds like that held by China (A1 with a negative outlook, according to Moody’s) in any other market. As an example, with the rise in the prices of Italian bonds you would gain 6%, according to the index of Bloomberg which replicates the evolution of these sovereign securities, while the United States debt is close to 2.1%. In contrast, an investor who had chosen an index fund to the main stock index of mainland China, the CSI 300, would earn 17% in 2024 in euros (15% in local currency) compared to 11% with the ten-year bond .
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