Chinese government bonds are on track for their strongest performance in a decade, with experts predicting further gains in 2025. A Bloomberg Index tracking local currency bonds indicates a total return of 9% for 2024, the highest since 2014. This impressive performance is driven by a significant drop in 10-year yields, plummeting 84 basis points since January to reach 1.71% on Thursday.
Table Content:
Economic Factors Driving Bond Market Strength
The outperformance of Chinese bonds compared to global counterparts is attributed to persistent economic weakness and slowing consumer spending, fueling expectations of further monetary easing by the People’s Bank of China (PBOC). Leading financial institutions like Tianfeng Securities, Zheshang Securities, and Standard Chartered Bank project 10-year yields to fall to between 1.5% and 1.6% by the end of 2025. This anticipated decline is predicated on the continuation of accommodative monetary policies and persistent economic headwinds.
Zhang Liling, fixed-income investment director at Bosera Fund Management Co., which manages substantial assets, highlights the prevailing economic uncertainty. “There are a lot of uncertainties for the economy next year, with much pending on the development of trade conflicts and the dollar’s strength,” she stated. This uncertainty reinforces the attractiveness of Chinese government bonds as a safe haven investment.
Navigating Increased Debt Issuance
Recent concerns regarding a potential surge in debt issuance have tempered the bond rally slightly. Reports indicate that policymakers are planning a record 3 trillion yuan issuance of special treasury bonds in 2025, a significant increase from the 1 trillion yuan issued this year. This, coupled with the finance ministry’s commitment to a wider fiscal deficit and increased spending, has raised questions about the market’s absorptive capacity.
However, historical data suggests the local bond market is capable of handling the increased supply, especially if the PBOC maintains its accommodative monetary policy and economic growth remains subdued. Zhu Zhengxing, a fund manager at Fullgoal Fund Management Co., emphasizes the ongoing positive sentiment toward bonds, citing persistent demand despite initial concerns about increased supply.
Yield Curve Implications and Investment Strategies
The impact of increased debt issuance is anticipated to affect the shape of the yield curve more significantly than the overall direction of yields. Bosera Fund’s Zhang favors shorter- and medium-dated notes for 2025, acknowledging the limited downside for long-term yields due to the heavier issuance.
Despite the lower yields, Chinese government bonds continue to offer attractive value as a safe-haven asset, particularly in a deflationary environment where capital preservation is paramount. Zhang emphasizes the scarcity of assets that offer a comparable level of certainty against losses in such conditions.
Conclusion: Continued Optimism for Chinese Bonds
The outlook for Chinese government bonds remains positive for 2025. Despite challenges posed by increased debt issuance, the expectation of continued monetary easing, coupled with persistent economic uncertainties, supports the case for further gains. Investors are advised to carefully consider the potential impact on the yield curve and adjust their strategies accordingly, focusing on shorter- to medium-term notes while recognizing the enduring value of Chinese bonds as a safe-haven asset.
