CNY: Yields in free fall - Commerzbank

In China, the significant decline in the current interest rate for 10-year government bonds continues, and today's economic data are not likely to do much to stop this trend. Since the beginning of the month alone, the current interest rate has fallen by around 30 basis points and, at 1.72%, is now well below the 2.25% that the PBoC still considered the lower limit at the middle of the year. Meanwhile, the interest rate on 30-year Chinese government bonds fell below the 2% mark for the first time this morning, Commerzbank's FX analyst Volkmar Baur notes.

Continuing economic problems in China are to blame

"As data published today shows, domestic demand in particular continues to cause problems. Retail sales weakened again in November after a stronger October and rose by only 3% year-on-year, while analysts had expected 5%. And investments also failed to meet expectations once again. In the housing market, home sales rose year-on-year for the first time in a long while, but housing starts and building activity remain well below last year's levels."

"However, it is still unclear what triggered this massive slide in current interest rates this month. After all, the economy has been weaker for quite some time and has not deteriorated dramatically in recent weeks. What is clear, however, is that the bond market is sending a warning signal that could also have an impact on the currency market."

"Now, the links between interest rate and foreign exchange markets in China are not as obvious and direct as in other countries. After all, the currency is controlled and managed by the central bank. However, this increasing discrepancy between interest rate differentials and exchange rates will have to be closed in some way. Either through rising interest rates in China, falling interest rates in the US, or a higher USD/CNY."