China goes its own way in global debt selloff with 10-year yield at 1.7%

With Chinese 10-year yields more than 3.5 percentage points below those on comparable US debt, the yuan comes under downward pressure and looks attractive as a funding currency for carry trades. To contain that weakness, the People's Bank of China is leaning on capital controls and its daily fixing. The central bank's own bond buying suggests Beijing is at ease with low rates, so a policy-driven reversal in Chinese debt looks unlikely while the domestic economy stays soft. For global markets, China is a source of disinflation rather than another contributor to the yield surge, and the appetite of its banks for government bonds points to very limited credit demand. Should any sign emerge that savings are rotating out of bonds and into equities, that would be an important move for mainland stocks.

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While other countries fret over climbing borrowing costs, China has the reverse problem: an excess of savings chasing too few places to invest.

Summary:

• China's 10-year benchmark government bond yield has touched a low of 1.7%, more than 3 percentage points beneath the 5.3% yield on the corresponding US Treasury
• Yields in China also sit lower than their UK, French and even Japanese counterparts
• Around the world, yields are climbing on the back of substantial sovereign issuance, energy inflation caused by the war and capital needs tied to artificial intelligence
• Weak consumption and a property slump that has now run for years weigh on China's economy, even as exporters stay busy
• The People's Bank of China has bought bonds on a net basis this year, reversing course from 2024, when Beijing had planned to sell them to lift yields
• Banks in China held roughly 29 trillion yuan ($4.4 trillion) of bonds as of August, more than double the 2022 level

As the Wall Street Journal (gated) reported, China's government bond market is heading the other way from the rest of the world, with yields falling this year even while a global sell-off drives borrowing costs to multi-decade highs elsewhere.

The 10-year Chinese government yield, the benchmark, has touched 1.7% — more than 3 percentage points under the 5.3% yield on the comparable US Treasury. Rates in China are comfortably below those in the UK and France, and still lower than Japan's, long the classic example of ultralow yields. Economists at ING said China is defying the broader global pattern.

Elsewhere, growing government debt and the inflationary shock from the Iran war, which has raised energy prices, have pushed yields higher. AI is also at work, lifting expectations for growth and shifting cash away from government bonds toward AI developers and data-centre builders.

China's conditions differ. Exports are strong, while consumption is soft and property remains stuck in a multiyear downturn. Inflation has ticked up but is a much smaller worry than in the US and other large economies.

Low yields have their own downsides. Savers earn less income and may therefore save more and curb spending. Such yields also imply a weak growth outlook, potentially weighing on hiring and investment, and may drive investors toward riskier assets as they seek returns.

Beijing's approach has changed sharply. As recently as 2024, concern about sliding yields led officials to plan government-bond sales in order to force them higher. This year the central bank has instead been a net buyer, suggesting it regards lower borrowing costs as useful for weaker parts of the economy. One China economist read the shift as officials feeling comfortable with lower yields.

At the root is the limited set of alternatives for China's large savings pool. Capital controls keep household money at home, property has lost its standing as a reliable store of wealth, and stock market returns have been poor over the long run. That leaves wealth-management products, heavily weighted toward bonds, as the fallback. Banks are even larger buyers, with bond holdings of about 29 trillion yuan ($4.4 trillion) as of August, more than double their 2022 total, in an environment of soft loan demand. The speed of any recovery in domestic demand will decide if this savings glut continues to hold Chinese yields down.