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17/01/2025
The bond market sees the convergence of Chinese and Japanese yields as a warning of potential 'Japanization' in China
In an environment of sharply rising global bond yields, one country stands out: China. Here, yields have been falling across all maturities. After hitting multi-year lows, there has been a slight countermovement recently, but the charts continue to speak for themselves and worry bond markets.[1]
At the long end, the move has been particularly striking. In November last year, the yield on 30-year Chinese government bonds fell below that of their Japanese counterparts. This drop in Chinese yields takes them below those of the country that has long been the benchmark for deflation and economic stagnation. The fear is that China may be on its way to a form of ‘Japanization’ – a repeat of the long period of weak growth and deflation that Japan suffered and only now seems to be emerging from.[2] Currently, Japanese yields are still well below Chinese yields in maturities up to ten years. But even here, the trend seems to be toward further convergence.
The convergence in yields between Asia's two largest economies has been unfolding for years, driven by contrasting economic developments.
Opposing yield trends
Chinese yields in a downward trend
*JGB = Japanese Government Bonds
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 1/14/25
In Japan, expectations of renewed growth and rising inflation are becoming more evident. Meanwhile, in China, concerns about stagnating growth, deflation risks, and the potential for increased U.S. tariffs – which would further impede growth—are being priced in.
There are fears of a balance sheet recession similar to that experienced by its Asian neighbors in the 1990s. Recent stimulus packages have successfully supported a growth rebound in China, as Q4 figures could show, but headwinds are likely to intensify going forward (U.S. tariffs being the key factor). On prices, there are concerns that the deflationary trend cannot be reversed in the short term by monetary and fiscal measures.
If the bond market serves as any indicator, China's economic outlook appears bleak. However, we believe there is still potential for China to rejuvenate its growth and avert the risk of a Japanization.
All market data – unless otherwise quoted – Bloomberg Finance L.P. as of 1/14/25
Reuters as of 1/9/25
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