China's Bond Market Struggles Amidst Economic Uncertainty

China's bond market is facing challenges as the country's economy shows signs of weakening. Concerns over a potential 'balance sheet' recession similar to Japan's 'lost decades' have arisen as bank loans contract and demand weakens.

The weakening demand is evident in the plunge in corporate borrowing, household debt repayment, real estate collapse, core inflation drop, sluggish retail sales, and contraction in services activity. The People's Bank of China (PBOC) has intervened in the market to address stagnation concerns, but bond yields remain at record lows.

Despite the similarities with Japan, differences such as the debt-to-GDP ratio and the absence of significant liability contraction suggest China's situation may not be as severe. However, China's bond market still faces challenges from bond vigilantes and a potential bubble, prompting the PBOC to tighten control.