The ViewThe outlook for China’s economy is poor, but the smart money says there will be further stimulus measures

Nicholas Spiro says bad news seems to be good news in China’s bond market. Weak economic data has fuelled a government bond rally – with foreign investors betting big on a forthcoming stimulus – even as the stock market suffers

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Pedestrians on an elevated walkway that displays stock figures at Lujiazui financial district in Pudong, Shanghai. China’s bond market is optimistic about further stimulus to the economy, but the stock market is pessimistic. Photo: Bloomberg

Published: 1:00pm, 17 Dec 2018Updated: 10:36pm, 17 Dec 2018

Is bad news good news in China? Ever since the world’s leading central banks resorted to ultra-loose monetary policies to stave off a depression, following the 2008 financial crisis, poor economic data has often been cheered by investors on the grounds that it makes more stimulus likely, instilling confidence in markets and lifting asset prices.

In China, weak economic data has been coming in thick and fast. Last Friday, the country’s statistics bureau announced that retail sales in November grew at their slowest pace in 15 years, with car sales on course for their first annual decline in nearly three decades. Industrial output was also weaker than anticipated, growing at its slowest pace in nearly three years.

The news of an intensifying slowdown in the world’s second-largest economy has rattled markets which, as I have argued previously, are getting a global growth scare because of China and, more recently, the euro zone. The benchmark S&P 500 has slipped to its lowest level since early April despite signs that the United States’ own economy is holding up well.

Yet, in China’s government debt market, bad economic news has helped fuel a blistering rally. The yield on China’s 10-year bond has fallen nearly 65 basis points since mid-January, to 3.36 per cent. The rally has been even fiercer in the money market. The one-month Shanghai Interbank Offered Rate has plummeted 200 basis points since the start of this year, to 2.88 per cent.

A worker walks through a warehouse for online retailer Tmall in Jiangmen, Guangdong province. China’s retail sales in November grew at their slowest pace in 15 years. Photo: EPA

With sovereign bonds in other emerging markets suffering heavy losses due to the tightening in financial conditions caused by the hike in US interest rates, foreign investors have poured money into China’s government debt market, further enticed by the country’s entry into global bond indices. According to a report by Morgan Stanley, published on November 25, foreign inflows to China’s sovereign debt market this year are on track to reach US$100 billion, only slightly less than the entire stock of foreign holdings in Brazilian government bonds, the largest overseas position in any emerging market.