There is a bubble in the Chinese government bond market — or so, at least, the People’s Bank of China would fervently like to believe. A bubble would be a worrying risk to financial stability. The existence of such a risk, however, is far more palatable than the plausible alternative: that bond markets are sending out an increasingly dire signal of concern about the prospects for China’s economy, the danger of deflation and the need for a change of course.
With no end in sight to China’s housing market downturn, households have little appetite for property, while domestic companies are suffering from weak consumption and the aftermath of Beijing’s crackdown on the technology industry. Deposits, meanwhile, are only attractive if you expect interest rates to rise in the future. With the outlook so gloomy, it seems wholly rational for Chinese investors to flock into bonds and gold.
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