China bond yields hit record low after Beijing pledges ‘vigorous’ promotion of domestic consumption

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Chinese stock markets fell and bond yields hit further record lows on Friday after Communist party leaders pledged lower interest rates and “vigorous” efforts to boost domestic consumption.

President Xi Jinping and senior party leaders vowed to increase China’s fiscal deficit and issue more “ultra-long” special bonds at the two-day Central Economic Work Conference, which is used to set the country’s economic policy path for the coming year.  

A report on the conclusions of the meeting that was issued through state media said China would lower interest rates and reduce at “an appropriate time” the deposits that banks must hold as reserves.

The meeting underlined concern over the health of the world’s second-largest economy, which has for months flirted with deflation as consumers and businesses have pulled back from spending, leaving exports to drive growth. 

The meeting report listed the pledge to “vigorously boost consumption” as the first of a list of policy priorities.

Beijing would expand domestic demand “in all directions” while implementing other “special actions”, it said, without offering further detail. 

China’s benchmark CSI 300 of mainland-listed companies was down 1.8 per cent on Friday. Hong Kong’s Hang Seng Index fell 1.5 per cent, with losses led by Chinese companies listed in the territory.

Chinese debt continued to rally, with yields on the benchmark 10-year sovereign bond falling 0.05 percentage points to a new low of 1.77 per cent.

“There were no immediate bazooka-style stimulus measures being included in the full statement of the CEWC,” wrote Jason Lui, head of Apac equity and derivative strategy at BNP Paribas.

The party meeting followed China’s change to its “moderately loose” monetary policy stance on Monday.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said it was clear Beijing would step up support for the economy, but that analysts would have to wait until after Trump’s tariff measures became clearer for specific details of the leadership’s intentions. 

“The shift of policy this week is clearly more significant than that [which] took place in the last week of September,” Zhang said, referring to a package of stimulus measures that included interest rate cuts.

China’s export strategy has already unsettled many of China’s trade partners around the world and is expected to run into further problems next year as Donald Trump becomes US president with plans to hit Chinese goods with extra tariffs.

China “faces a deepening adverse impact from the changing external environment and our country’s economy still faces many difficulties and challenges”, the meeting report said.

Kelvin Lam, economist at Pantheon Macroeconomics, said there was still little clarity on what exactly the government would do to boost consumption. “The lack of details . . . disappoints the market,” he said.

Lam said he did not expect Beijing to implement consumption boosting-measures such as cash handouts, but that it was likely to seek to strengthen social security, roll out more trade-in programmes or try to stoke the stock market and increase investment.

“At this stage, we do not think there will be a fiscal bazooka that some investors hope to see, but the positive thing is that, for 2025, the fiscal package will be more accommodative compared to the last three months,” said Zhu Haibin, chief China economist at JPMorgan. 

Zhu said he expected some stimulus next year and “a record high budget deficit and record high government bond issuance”, adding that ultra-long special government bond issuance could double to Rmb2tn ($275bn) in 2025.

Chief China economist at Bank of America Helen Qiao wrote that the lack of detail on fiscal and monetary policy was “expected”, adding in a note that “typically these are not announced until the Two Sessions [meeting] in March”.