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The difference between the borrowing costs of the US and China has reached its widest point in over ten years, indicating a significant contrast in the bond market’s outlook for the two largest economies in the world.
On Friday, yields on China’s 10-year government bonds dropped by 0.05 percentage points to 1.77 percent, marking a new record low following signals from Beijing suggesting a potential decrease in interest rates. Meanwhile, US 10-year bond yields saw a slight increase to 4.33 percent. Yields decrease as prices rise.
This has led to a gap of more than 2.5 percentage points between the two, the largest since at least 2011 according to LSEG data. The widening gap reflects concerns about China’s economy entering a deflationary phase and the expectation that US President-elect Donald Trump will implement aggressive fiscal measures to stimulate the US economy, potentially increasing its deficit.
“This is a result of the decoupling between the US and China,” said Ju Wang, head of China FX and rates at BNP Paribas, noting that the differing economic performance of the two countries can be partly attributed to deglobalization.
The yield differential also puts additional pressure on the Chinese renminbi, which has been depreciating due to the country’s economic slowdown and the renewed threat of a trade conflict with the US under the new administration.
A further decline in the renminbi could escalate tensions with the incoming US administration, as officials have previously accused China of currency manipulation.
The Chinese currency has depreciated further in recent days amid reports suggesting that Beijing might consider further devaluing its currency to support its exporters. The onshore renminbi now stands at 7.28 to the dollar, compared to 7.10 on November 5, the day of the US election.
The drop in yields follows commitments from Chinese Communist party officials to boost domestic consumption and lower interest rates to stimulate the economy.
On Friday, longer-term Chinese yields also fell, with the 30-year yield decreasing by 0.04 percentage points to 2.01 percent, and the two-year yield dropping by 0.05 percentage points to 1.18 percent.
“The overarching trend is that China is adopting a low inflation economic model while the US is pursuing a looser fiscal policy,” explained BNP’s Wang, predicting that China’s 10-year yield could potentially fall to 1.5 percent by the end of next year.
The rally in Chinese government bonds comes as investors seek safe havens amidst a prolonged stock market downturn.
The Communist party’s politburo, led by Xi Jinping, recently shifted its monetary policy stance from “prudent” to “moderately loose” for the first time in 14 years, indicating Beijing’s intention to take action to stimulate growth.