China’s economy has been hit by a slump in the property market and volatile stocks in recent months, but it may now be on the precipice of a bond bubble burst.
In an unprecedented move, the People’s Bank of China (PBOC) is borrowing bonds with the intention of selling them to calm the market. The failure of US bank SVB in 2023, the biggest of its kind since the global financial crash of 2008, 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 should observe and evaluate the financial market situation from a macroprudential perspective.
“Currently, we need to pay attention to maturity mismatch and interest rate risks associated with large holdings of medium and long-term bonds by some non-bank entities.
The yield on China’s 10-year government bond, which is a benchmark for a wide range of interest rates, fell to 2.18 percent on July 1 – the lowest since records began in 2002.
Meanwhile, 20-year and 30-year bond yields are flirting with historic lows. This comes against a backdrop of low consumer confidence and a weak property market.
That said, things may be turning around 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 small recovery may be political changes. Late 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 rising youth unemployment threatening to fuel resentment towards Xi Jinping and the Chinese Communist Party (CCP).
However, Xi fired back at his American counterpart, asserting the “strong resilience, tremendous potential and great vitality” of the Chinese economy.
Economists have pointed to some troubling developments in recent years that may explain all the major challenges China has managed to avoid for decades.
In China, people are much less likely to put their savings into a bank account to accrue interest or invest in stocks and shares. Instead, the country’s property boom has seen people’s savings effectively tied up in their homes or flats.
After the Covid pandemic, housing prices have fallen and with it, the people of China have become materially worse off.
As a result, China, unlike rival economies, did not recover well from Covid and has yet to recover.
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