For almost eternity, 30-year JGB (Japanese Govt Bonds) yields used to trade lower than 30-year CGBs (Chinese Govt Bonds). But since Nov’24, the reverse has happened. The 30-year JGB trades at 2.25 now & the 30-year CGB trades at 2.01. Moving to the 10year space, the 10-year CGB trades at 1.77 where as the 10-year JGB trades at 1.04. We believe that by the end of CY25, we might see the 10-year CGB yields trading below the 10-year JGB yields. Our view flows from the recent CEWC (Central Economic Work Conference) meeting minutes. The CEWC statement vowed to conduct “moderately accommodative” monetary policy, switching away from “prudent” monetary policy for the past 14 years. The use of words “moderately accommodative” for monetary policy is the first time since the Politburo meeting in July 2010. We see two rounds of policy rate cuts in Q1 and Q2 2025, respectively, and one 50bp RRR cut before end-2024 and two 50bp RRR cuts in 2025. Currently the 1-year LPR (Loan Prime Rate) is 3.35%. Even yesterday’s Chinese credit growth data was far worse than market estimates. This signals faltering in loan demand signaling still elevated challenges to Chinese economic growth. In summary, Chinese economic woes are unlikely to go away with current set of stimulus measures. We expect a co-ordinated fiscal & monetary policy response starting early CY25. Else China might soon resemble the 1990’s Japan plagued by high debt levels, a real estate crash, an ageing population & a tendency to use monetary tools to counter low growth low inflation. Hence, we expect 10-year CGB yields to keep falling towards 1% by end CY25. 10-year CGB yields have already fallen by 78 bps in CY24TD which is the largest drop since CY15. Global implications are that Chinese policy measures will drive disinflation through global supply chains via lower cost of capital as well as a rapidly deprecating CNH. Our target for CNH is 7.60 by end CY25.
