China’s economy has been dogged by a downturn in the property market and volatile stocks over recent months, but now it could be on the precipice of a bond bubble burst.
in an unprecedented move, the People’s Bank of China (PBOC) is borrowing bonds with a view to selling them to calm the market. The failure of US bank SVB in 2023, the biggest of its kind since the 2008 global financial crash, has served as a warning to China.
In late June this year, PBOC Governor Pan Gongsheng said at a financial forum: “SVB in the United States has taught us that the central bank needs to observe and evaluate the situation of the financial market from a macro-prudential perspective.
“At present, we must pay close attention to the maturity mismatch and interest rate risks associated with the large holdings of medium and long-term bonds by some non-bank entities.”
The yield on China’s onshore 10-year government bond, which is a benchmark for a wide range of interest rates, plummeted to 2.18 percent on July 1 – the lowest since records began in 2002.
Meanwhile, yields on 20-year and 30-year bonds are also flirting with historic lows. This comes against a backdrop of low consumer confidence and a weak property market.
That said, things may be turning round from a property perspective, with almost 60 percent of the top 100 property developers seeing a month-on-month increase in home sale values in June.
One reason behind the minor recovery could be policy shifts. At the end of last month, Beijing joined other cities, including Shanghai, in easing home buying policies and lowering the minimum down payment ratio for first-time home buyers to 20 percent.
Last year Joe Biden described the Chinese economy as “a ticking time bomb”, with slow growth and soaring youth unemployment threatening to spark resentment towards Xi Jinping and the Chinese Communist Party (CCP).
However, Xi fired a shot back at his US counterpart, backing the “strong resilience, tremendous potential and great vitality” of the Chinese economy.
Economists have pointed to several concerning developments in recent years that may all explain the significant challenges China has for decades managed to avoid.
In China, people are far less likely to put their savings in a bank account to accrue interest or to invest in stocks and shares. Instead, the property boom in the country has meant that people’s savings are effectively tied up in their houses or flats.
Following the Covid pandemic, housing prices have plummeted and with it, China’s people have become materially worse off.
As a result, China, unlike rival economies, has not recovered well from Covid and is yet to bounce back.
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