Chinese government bond yields dropped below 2% for the first time ever, highlighting deepening concerns about deflation in the world’s second-largest economy as the U.S. dollar reaches new highs amid diverging economic trajectories.
What Happened: The yield on China’s benchmark 10-year bond fell 1.5 basis points to 1.598%, while the 30-year yield declined 2.9 basis points to 1.819%. The People’s Bank of China is reportedly considering interest rate cuts this year, according to the Financial Times, as policymakers grapple with persistent deflationary pressures.
Since President-elect Donald Trump‘s election victory, market dynamics have shifted significantly. The U.S. Dollar Index has surged to 109.4, its highest level since October 2022, gaining 5.54% since Nov. 5. The strengthening dollar reflects expectations of prolonged higher U.S. rates and Trump’s proposed growth-focused policies.
The yuan has weakened to 7.30 against the dollar, down 2.82% since early November, adding to Beijing’s economic challenges. Chinese stocks continued their downward trend, with the CSI 300 index falling 0.18% on Friday, even as other Asian markets gained ground.
Why It Matters: The deflationary pressure in China has become particularly acute, with producer prices declining for 26 consecutive months, dropping 2.5% year-over-year in November. This has created a challenging environment for manufacturers, forcing many to cut prices amid overcapacity and weak demand.
U.S. markets have also started 2025 on a cautious note, with the Dow Jones Industrial Average down 0.36% to 42,392.27, the S&P 500 falling 0.22% to 5,868.55, and the Nasdaq Composite declining 0.16% to 19,280.79.
Japan’s 10-year government bond yield edged up to 1.09%, near its 13.5-year high of 1.11%, reflecting the country’s ongoing battle with inflation – a stark contrast to China’s deflationary struggles.
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