China's surprise decision to cut interest rates, including existing mortgage rates, signals a potential shift towards reflation and highlights the need for significant fiscal support to bolster growth. Analysts predict that Beijing will likely increase fiscal stimulus due to weak economic performance.
"We will need a major fiscal policy support to see higher CNY government bond yields ," said Edmund Goh, head of China fixed income at abrdn.
The differential between U.S. and Chinese government bond yields reflects how market expectations for growth in the world's two largest economies have diverged. For years, the Chinese yield had traded well above that of the U.S., giving investors an incentive to park capital in the fast-growing developing economy versus slower growth in the U.S.
"The market is forming a medium to long-term expectation on the U.S. growth rate, the inflation rate. cutting 50 basis points doesn't change this outlook much," said Yifei Ding, senior fixed income portfolio manager at Invesco. Asked Tuesday about the downward trend in Chinese government bond yields, PBOC Gov. Pan Gongsheng partly attributed it to a slower increase in government bond issuance. He said the central bank was working with the Ministry of Finance on the pace of bond issuance.Analysts generally don't expect the Chinese 10-year government bond yield to drop significantly in the near future.
Fiscal Policy China Economy Interest Rates Bond Yields Reflation
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