Investors betting on a China reflation trade may be in for a reality check, as rising government bond prices and lacklustre equities point to lingering doubts about whether inflation in the world’s second-largest economy can be sustained.
Yields on China’s one-year sovereign bonds have fallen by 5.5 basis points over the past three weeks, while 10-year yields are down 1.6 basis points. Over the same period, the benchmark CSI 300 Index has slipped about 1 per cent. Bond yields move inversely to prices but tend to track expectations for inflation and interest rates.
Taken together, the moves suggest limited conviction in the reflation narrative that gained traction after February data showed faster consumer price growth and a narrowing decline in producer prices.
Economists said the uptick in prices was likely driven more by higher commodity costs than a genuine recovery in demand, which remained constrained by a weak labour market and a prolonged property downturn.
“The recent high-frequency data shows that there’s no obvious change of the situation in which domestic demand remains weak,” said Li Yishuang, an analyst at Huafu Securities. “If a cut in the reserve requirement ratio can be delivered, that’ll bode well for bonds, particularly the longer-dated ones.”
That caution was evident on Friday, when government bonds rallied even after official data showed producer prices rose 0.5 per cent in March, snapping a 41-month deflation streak. The one-year yield fell by 2.6 basis points, while the 10-year yield edged down 0.3 basis points.