As the year draws to a close, the economic landscape of China is being shaped by recent meetings and policy adjustments aimed at fostering a more supportive financial environment. On December 9, 2024, a significant conference was convened where policymakers emphasized the need for a “moderately accommodative” monetary policy. This statement aligns with the country’s goal to enhance macroeconomic stability and tackle challenges presented by fluctuating global markets. With terms like “more active macro policies” and “enhanced contra-cyclical regulation” being put on the table, the focus has been squarely placed on rejuvenating domestic demand and consumer spending, which are seen as critical to driving the economy forward. An explicit mention of stabilizing both the real estate and stock markets marks a pivotal moment in the ongoing efforts to ensure economic resiliency.

Moving to the economic data released in November, the narrative becomes more complex. Despite a hopeful recovery in October, which showcased several areas of improvement, November figures painted a mixed picture. It is characterized by robust industrial production alongside weakened consumer demand. For instance, when examining the year-on-year figures, while industrial added value and real estate sales surpassed expectations, retail sales and exports lagged behind. This divergence raises concerns about the strength and sustainability of the recovery, pointing to a possible over-reliance on industrial output without a corresponding boost in consumer confidence.

In terms of financial health, November's aggregate financing data fell short of market expectations, with newly added RMB loans coming in at a considerably lower value than anticipated. Analysts had forecast an increase of around 9,208 billion yuan, but the reality was a far less encouraging figure of 5,800 billion yuan. Moreover, the sluggish performance of the Consumer Price Index (CPI) and the Producer Price Index (PPI) suggests that price pressures remain subdued, signaling potential challenges ahead. A mere 0.2% year-on-year rise in CPI compared to an expected 0.5% illustrates ongoing deflationary pressures in the economy, further complicating the central bank’s decision-making process.

Despite these challenges, a downward trend in bond yields is still observed, albeit with limited room for movement. Following the December conference and the emphasis on a “moderately accommodative” policy for 2025, the bond market is showing increasing confidence in future rate cuts. The yield on 10-year government bonds, which hovered around 2%, has dipped to approximately 1.7% in anticipation of further easing. Analysis of the spread between the 10-year bonds and the policy interest rate indicates an expectation of substantial rate reductions, with current spreads dropping from an average of 70 basis points over the past few years to just 20 basis points recently.

Beyond monetary policy, the potential for a “more proactive” fiscal policy in 2025 becomes a focal point, especially regarding the scale of funding for tangible projects beyond merely addressing debt. The degree to which consumption and domestic demand will be supported by government initiatives remains to be seen, but it’s clear that such measures are crucial for stimulating economic recovery. Additionally, ongoing scrutiny of U.S. trade policies post-Presidency, and domestic countermeasures in response to them, will be essential to watch.

Given the ongoing economic data trends, with mixed signals of improvement and the already anticipated monetary easing, the bond market may maintain a downward trajectory in interest rates over the short term, although the extent of this movement appears limited. This environment necessitates careful observation of any signals that could indicate a shift in interest rates, such as fiscal policy developments and specific support measures. If fiscal policies exceed expectations and inject substantial funds into the economy, a rapid resurgence in economic activity could instigate a rise in interest rates.

The details regarding policies aimed at stimulating domestic demand, along with critical price indicators like PPI, CPI, and real estate prices, must remain in focus. An uptick in PPI and CPI could reflect an increase in market demand and inflationary pressures that would undoubtedly affect the bond market. Moreover, stabilizing or elevating real estate prices could spark growth in related industries, thereby amplifying investment and consumption needs. Increased credit demand, especially in the realm of medium- and long-term loans for businesses and households, would suggest a strengthened financing requirement from the real economy, signalling enhanced economic vigor which could, in turn, lead to rising rates.

In light of these insights, short-duration, high-rated bonds are recommended for investors looking to navigate the current environment. Selecting investments with better value within specific bond varieties, such as interbank certificates of deposit, could also prove advantageous. Short-duration bonds help mitigate risks associated with interest rate fluctuations, while high-rated bonds afford substantial safety and stability amidst market uncertainties. Interbank deposits, recognized for their relative liquidity and lower risk, may present promising investment opportunities under present circumstances. Adjusting investment portfolios to reflect market dynamics and individual risk tolerances can facilitate the preservation and growth of assets in challenging economic times.