The Reasons Why China’s Bond Market Is Booming

With China’s government bond market recording its best return since 2014, we find out why investors are gravitating towards fixed income.

In 2024, China’s government bond market recorded its best return since 2014, with an overall gain of 9%.¹ This performance was mainly driven by expectations that interest rates would decline because of stimulatory policies and the desire among domestic investors for a potentially more secure investment. This contrasts with other major bond markets, such as the US and Europe, where bond yields rose as interest rates declined.

Two factors underpinning China’s booming bond market are challenges in the property sector and investor behaviour in an economy straining to escape deflation. Again, this stands in contrast to the Western economies, where elevated (although gradually falling) interest rates are in place to curb rising prices.

The Property Sector is No Longer Seen as a Safe Haven

Property has long been a popular wealth accumulation option for many people in China, mainly because it generated consistent returns. More recently, overcapacity and property development debt issues have led to declining real estate prices. In turn, this has had a negative wealth effect as real estate losses mean that investors spend less and seek ‘safer’ saving alternatives. Indeed, the sector’s decline is estimated to have removed around US$18 trillion in household wealth.²

In response, the government has implemented several policy measures to stabilise the property market. In time, these may help alleviate the sector’s challenges and help moderate the currently high demand for bonds. Recent data is tentatively indicating that stabilisation or a change in trajectory is underway. In December 2024, property prices in China’s four largest cities posted increases, while prices across the next 70 major cities fell by the smallest percentage since June 2023.³

The Economy is Growing, But Deflation Poses a Threat

China managed to post gross domestic product (GDP) growth of 5% for 2024, mainly generated by a strong export sector.⁴ The country’s policymakers are working to transfer the gains made by China’s strong export and industrial performance to everyday consumers. However, people have felt worse off as, for example, many in the private sector have seen their pay trimmed.⁵ Unemployment among younger people and low social welfare payments have also reduced consumer confidence. This uncertainty has negatively impacted demand for consumer goods and stoked deflation.⁶

Such a scenario can lead to a downward cycle whereby consumers become conditioned to expect prices to fall for goods and, therefore, postpone spending. This leads to less business income and lower demand for labour, which reduces incomes and overall economic activity. People and businesses may choose to reduce debt and save more. Japan has endured such an environment for many decades and has only recently escaped the deflationary trap.⁷

China’s Government Issues Bonds to Stimulate the Economy

China’s government has issued several ultra-long-term bonds in the past year and plans to issue more in 2025. These bonds mature in 20, 30 or 50 years,⁸ and the funds raised will be used to trigger economic demand.⁹ Spending examples include major infrastructure projects, such as airports, as well as subsidies and grants for consumers and businesses seeking to upgrade or replace older equipment or consumer goods.¹⁰

In the future, subsidies for tablets, smartphones and smartwatches will also be available. These moves should provide a stimulatory boost to the consumer-goods-related sectors of the economy. China’s civil servants have also received a pay increase that may feed into higher consumer spending.¹¹

A Negative Correlation to Most Other Markets

The economy of China is at a different stage of the monetary policy cycle compared to many territories elsewhere, which partly explains the negative correlation of its fixed-income market to other economies. Another critical factor is that China’s bonds are primarily held by domestic banks, pension funds, and other financial institutions for the long term. This partly explains why bonds are booming in China but falling in most other markets.

Of note, fixed-income investors anticipate further interest rate cuts, which would boost the current attractiveness of bonds. From an institutional perspective, fund managers will appreciate the diversification benefits this offers. At some stage in the future, China’s economy and monetary policy cycle may converge with the rest of the world – at which point bond market performance could also be expected to intersect.

The People's Bank of China (PBOC) is attempting to ease monetary policy to help the economy while tempering the bond rally and keeping the currency relatively stable.¹² This is a tricky balancing act, but policymakers do have tools they can harness to achieve such an outcome. The government recently sanctioned institutional bond investors who had committed irregularities, indicating its willingness to clamp down on behaviour that feeds the bond boom.¹³

US Tariffs and Policies are a Significant Source of Uncertainty

The emerging policy stance of President Donald Trump’s administration will determine the pathway for interest rates and, therefore, US bond yields. Tariffs and reflationary policies could mean that US interest rates remain higher for longer and reinforce US dollar strength. This would slow the pace at which Southeast Asian markets can adopt a more accommodative monetary policy stance by reducing their interest rates. Across Southeast Asian markets, there is considerable divergence in inflationary pressures and domestic conditions, so not all markets can ease their monetary policy.

President Trump may decide to implement targeted tariffs on specific economies, as he has threatened to do with China. If this occurs, the affected markets could suffer negative investor sentiment and severe economic consequences.

China’s Bond Boom Indirectly Effects Southeast Asia

Many Southeast Asian bond markets mirror the US and sit at a different point in the monetary policy cycle than China. As interest rates decline, local-currency bonds in most Southeast Asian territories could become more attractive to investors. However, the performance of China’s economy is essential to the region owing to extensive economic trade and investment ties. This makes China’s ability to navigate safely out of its deflationary dangers crucial.