Chinese Foreign Bonds Surge to Record 24.9% of EM Debt Issuance in Q1 2025

In the first quarter of 2025, Chinese foreign bonds—particularly those denominated in G3 currencies (USD, EUR, JPY)—accounted for 24.9% of all emerging market (EM) bond issuance in Asia, excluding Japan and Australasia, marking a historic high. This surge underscores China’s growing dominance in the EM debt landscape, driven by fiscal stimulus, geopolitical resilience, and the allure of its bonds as a "safe haven" amid global uncertainty.

The Surge in Chinese Bond Issuance

China’s G3 bond issuance soared to $23.1 billion in Q1 2025, a 57.4% jump from the same period in 2024. Major issuers included state-backed entities such as Bank of China ($1.5 billion across multiple tranches) and Beijing Capital ($900 million), signaling confidence in China’s creditworthiness. Meanwhile, the broader Asian EM bond market grew 48.2% YoY to $92.84 billion, with China overtaking South Korea as the second-largest issuer despite Seoul’s larger absolute volume.

The ESG bond market also saw China take the lead, issuing $6.73 billion in green, social, and sustainability-linked bonds—nearly half of the regional total. This reflects a strategic shift toward high-quality issuers, as the real estate sector’s share of China/Hong Kong’s dollar bond universe plummeted to 8% in 2024 from 25% in 2020, replaced by safer financial institutions.

Why the Dominance?

1. Fiscal Stimulus and Policy Support

Beijing’s defensive fiscal measures, including transfers to local governments to tackle debt obligations, are projected to total 10–15% of GDP in 2025. These measures, akin to past European debt crisis responses, aim to prevent economic "stall speed" below 4.5% GDP growth. Additionally, Beijing has eased restrictions on private enterprises, boosting demand for government bonds as investors seek stability.

2. Economic Fundamentals

China’s real GDP growth of 5.4% in Q1 2025 outpaced expectations, supported by a rebound in corporate earnings. While inflation remains subdued (0.1% in 2024 vs. 2.5% in the U.S.), the negative yield spread between U.S. Treasuries and Chinese CGBs—e.g., -300 bps in late 2024—has created an arbitrage opportunity. Even with capital controls, the allure of higher yields in a low-inflation environment has drawn investors.

3. Geopolitical Resilience

Despite U.S. tariffs (up to 245% on Chinese goods), China’s trade surplus hit $969 billion in 2024, and exports reached a record $3.5 trillion. This strength, coupled with Beijing’s retaliatory measures (e.g., 125% tariffs on U.S. imports), has paradoxically bolstered fiscal flexibility. Analysts argue that further U.S. protectionism could trigger additional domestic stimulus, indirectly supporting bond issuance.

Technical Analysis: Yields, Spreads, and Market Dynamics

• CGB Yields: The 10-year CGB yield is projected to rise to 1.75–2.00% in 2025, still far below China’s nominal GDP growth rate (3.5–4.0%). This divergence reflects PBOC interventions, including indirect bond purchases to suppress yields.
• Spread Compression: The yield gap between policy bank bonds and CGBs has narrowed to 5 bps (from 38 bps in 2021), driven by a "search for yield" among institutions. However, this compression is unsustainable; spreads may widen as CGB yields drift higher.
• Equity-Bond Correlation: In late 2024, Chinese bonds and equities exhibited an unusual positive correlation, with yields failing to rise alongside equity rallies. This reflects excess household savings flooding into bonds, PBOC liquidity injections, and skepticism over property market recovery.

Risks and Challenges

• U.S. Interest Rates: If the Fed’s prolonged rate hikes push U.S. yields higher, the negative yield spread with Chinese bonds could invert, undermining their appeal.
• Policy Execution: Fiscal measures may falter if they fail to restore private-sector confidence or address structural issues like demographics.
• Geopolitical Escalation: New trade barriers could strain China’s export-driven growth, though such risks may already be priced in, prompting further stimulus.

Conclusion

China’s record share of EM debt issuance in Q1 2025—a 24.9% stake in Asia’s G3 bond market—is no accident. Fiscal firepower, low inflation, and the structural shift toward high-quality issuers have positioned Chinese bonds as the bedrock of EM portfolios. While risks linger, the combination of Beijing’s policy support, robust trade performance, and the 1.65% yield on 10-year CGBs (vs. 3.4% on U.S. Treasuries) ensures their dominance.

Investors should note that 2025 may see stronger equity performance, but bonds will remain critical for diversification. With $220 billion of China’s bonds issued by November 2025—accounting for 41.5% of the global EM total—the trend is clear: Beijing’s debt is now the safe haven in an unsafe world.

As the data shows, this isn’t just a regional story—it’s a global shift. For EM investors, ignoring China’s bonds is no longer an option.