Commentary: Winners and Losers in China’s Low-Interest-Rate Era

China's government bond market recently saw a significant shift as the 10-year government bond yield dropped below 2% in December, marking the onset of a low-interest-rate era in the country [para. 1]. This trend, which began around 2017, highlights a deceleration in economic growth accompanied by reduced inflationary pressures. In 2024, the monetary policy transitioned from a "prudent" stance to a "moderately loose" one, further speeding up the decrease in long-term rates [para. 2]. Indicating a historical low, both the 10-year and 30-year Chinese government bond yields fell under 2% by December's end, a level not seen since comprehensive data started being collected in 2002 [para. 3].

Predictions for the future suggest a continuation of this low interest rate pattern, with rates expected to remain below 2% for a few years. However, if unforeseen circumstances arise, these low rates might persist for longer, possibly spanning a decade [para. 4]. It's vital to focus on the real interest rate instead of just the nominal rates. Presently, China's 10-year real yield, calculated after factoring in the consumer price index, stands at about 1.8%, surpassing the 1.1% average from 2005 to 2024. This real yield is significantly higher than those of Japan (0.1%), the U.S. (0.3%), and Europe (-0.6%) during a similar timeline [para. 5]. Given China's low inflation outlook, reducing nominal interest rates seems the primary way to lower real interest rates [para. 6].

Learning from other countries, such as Japan and some European nations, is beneficial here. While U.S. 10-year Treasury bond yields dropped below 2% during specific periods, including during the Covid-19 pandemic, Japan and Europe experienced much longer durations of low yields. Japanese 10-year bond yields have been under 2% since 1997, nearing zero from 2016 to 2022, whereas European yields dipped below 2% following the debt crisis in 2012 and turned negative between 2019 and 2021 [para. 8][para. 9]. In contrast, China, deemed more economically vibrant than Japan and Europe, is less likely to see a decade of sub-2% yields, assuming no major disruptions [para. 10].

China's quick adaptation and manufacturing prowess, supported by government policies, have it producing nearly 30% of global manufacturing output, albeit consuming only 13% globally. While leading in investment and export shares, China faces challenges in catching up its demand with supply, pointing to sustained low inflation rates and extended low interest rates compared to other developed economies [para. 12]. Lower interest rates raise questions regarding the impact on the domestic stock market. A decreased cost of capital could benefit the market if companies sustain profit growth and investors remain optimistic. Conversely, if the low rates are viewed as symptomatic of deeper economic issues, it could dampen long-term growth expectations [para. 14].

Industry-specific factors will determine stock performance in a low-rate environment. Companies reliant less on domestic markets or with robust bargaining power might perform better. Historically, Japanese automobile and electronics exporters thrived during Japan’s economic stagnation, as did European luxury brands and U.S. tech firms, supported by less domestic economic dependency [para. 18]. Vincent Chan, a strategist at Aletheia Capital, emphasizes the importance of sound monetary policy and responsive corporate strategies to encourage domestic demand amidst deflationary trends [para. 17].