China's sovereign bond yields have reached their highest levels this year, marking a significant shift in the financial landscape. On Monday, yields on China's 10-year government bond climbed over 10 basis points, hitting 1.865%, the highest for 2023. This rise comes as the Chinese government announces an unprecedented increase in its fiscal budget deficit to 4% of GDP, the highest since at least 2010. In a move to bolster economic growth, Beijing plans to issue ultra-long-term special treasury bonds worth 1.3 trillion yuan ($178.9 billion) by 2025.
The People's Bank of China (PBOC) aims to maintain currency stability at a "reasonable and balanced level," yet it has not acted on lowering policy rates despite frequent indications since late last year. The increase in bond yields has led to a decline in sovereign bond prices, influenced by investor speculation that additional fiscal spending will enhance growth and delay interest rate cuts.
"Rising bond yields in China provide a counterweight against depreciation pressure on the Renminbi, especially in the context of falling U.S. yields," – Neumann
On the same day, the Chinese offshore yuan depreciated by approximately 0.24%, trading at 7.2588 against the U.S. dollar. This movement reflects broader market dynamics and investor responses to fiscal policy changes. Furthermore, investor sentiment has shifted towards equities over government bonds, driven by expectations of growth and returns.
"Growth optimism has returned in China," – Frederic Neumann, chief Asia economist at HSBC Bank
China's bold fiscal measures are part of its strategy to achieve an ambitious growth target of around 5%, as outlined in a high-level government work report. The government has also announced plans for an additional 300 billion bond issuance quota from the previous year, indicating a continued focus on economic expansion.
"There is still room for long-end rates to correct further on a potentially faster issuance pace of long-dated bonds, the government's aim to boost property market and consumption, and ongoing equity rally," – Ju Wang, head of Greater China FX and rates strategy at BNP Paribas
Despite rising domestic bond yields, the MSCI China index has surged nearly 20% this year, while the Hong Kong-listed Hang Seng Index has outperformed global peers with an increase of over 18% year-to-date. These gains reflect increased investor confidence in China's growth prospects.
"Investor sentiment has become more bullish following the re-rating in offshore equities triggered by DeepSeek, leading to a shift in favor of equities over government bonds," – Carlos Casanova, senior economist of Asia at UBP
In contrast, the U.S. 10-year Treasury yield has experienced a decline of over 50 basis points since January, trading around 4.2839% on Monday. This divergence between U.S. and Chinese bond yields highlights differing economic trajectories and policy approaches.