Chinese Bond Yields Plunge Below 2% Amid Deflation Fears and US Dollar Surge

Chinese bond yields have plummeted to an unprecedented low, with the 10-year government bond yield falling below 2% for the first time ever. This significant decline reflects deepening concerns about deflation in the world's second-largest economy, as the US dollar reaches new highs amid diverging economic trajectories. The yield on China's benchmark 10-year bond fell 1.5 basis points to 1.598% on January 3, 2025, while the 30-year yield declined 2.9 basis points to 1.819% (Financial Times, 2025).

The People's Bank of China (PBOC) is reportedly considering interest rate cuts this year, as policymakers grapple with persistent deflationary pressures. Since President-elect Donald Trump's election victory, market dynamics have shifted significantly, with the US Dollar Index surging to 109.4, its highest level since October 2022, gaining 5.54% since November 5, 2024 (Financial Times, 2025). The strengthening dollar reflects expectations of prolonged higher US rates and Trump's proposed growth-focused policies.



The yuan has weakened to 7.30 against the dollar, down 2.82% since early November 2024, adding to Beijing's economic challenges. Chinese stocks continued their downward trend, with the CSI 300 index falling 0.18% on Friday, even as other Asian markets gained ground. U.S. markets have also started 2025 on a cautious note, with the Dow Jones Industrial Average down 0.36% to 42,392.27, the S&P 500 falling 0.22% to 5,868.55, and the Nasdaq Composite declining 0.16% to 19,280.79 (Financial Times, 2025).

The deflationary pressure in China has been evident for 26 consecutive months, with the consumer price index (CPI) dropping 2.5% year-over-year in November 2024. This has created a challenging environment for manufacturers, forcing many to cut prices amid overcapacity and weak demand. U.S. markets have also started 2025 on a cautious note, with the Dow Jones Industrial Average down 0.36% to 42,392.27, the S&P 500 falling 0.22% to 5,868.55, and the Nasdaq Composite declining 0.16% to 19,280.79 (Financial Times, 2025).

In conclusion, the plunge in Chinese bond yields below 2% reflects deepening concerns about deflation in the world's second-largest economy, as the US dollar reaches new highs amid diverging economic trajectories. The PBOC's consideration of interest rate cuts and the yuan's depreciation highlight the challenges China faces in maintaining economic growth and stability. Investors should closely monitor the situation, as the potential risks and uncertainties may impact global markets and the broader economy.