(Bloomberg) — An escalation of China’s fight against bearish traders has done little to improve sentiment, with fears that policy measures will fail to end a deflationary spiral.
Most Read from Bloomberg
A renewed effort by authorities to prop up financial markets has drawn a muted response so far. The yuan is hovering near the weaker end of its trading band and the benchmark bond yield is just a few basis points away from a record low. The MSCI China Index is poised to enter a bear market.
That’s even after the People’s Bank of China undertook successive steps to prop up the yuan. Just this week, the central bank stepped up its support for the currency via the daily fixing, boosted demand for the yuan offshore and said it’s temporarily suspending bond purchases.
What’s missing, analysts say, is a mix of strong monetary and fiscal support to steer the world’s second-largest economy out of its malaise. With the specter of higher US tariffs further dimming the outlook for an economy mired in a property crisis, measures aimed at drawing a red line on the yuan or curbing a bond frenzy can only bring short-lived market relief, they say.
“A lack of strong fiscal policy support is the problem,” said Alvin T. Tan, head of Asia FX strategy at the Royal Bank of Canada in Singapore. “Monetary and financial support measures without strong fiscal support will provide just a temporary band-aid.”
Such across-the-board market weakness may fuel capital outflows and exacerbate price declines — a scenario policymakers would want to avoid at all costs.
The PBOC has used the yuan’s daily reference rate to cap currency losses this week, while also raising its bill issuance in Hong Kong to a record to squeeze short sellers. Despite all this, the offshore yuan is set for a mere 0.1% weekly advance. In onshore trading, the currency has stayed dangerously close to the weak side of the allowed trading band.
Benchmark 10-year bond yields erased their intra-day gains on Friday following the central bank’s surprise suspension of bond purchases. Yields had tumbled to unprecedented levels in recent weeks as a grim economic outlook spurred a rush to the safest assets.
As the yield divergence with the US remains wide and economic confidence hasn’t rebounded swiftly in China, “the impact of current measures may be short-lived,” said Gary Ng, senior economist at Natixis SA. “Such measures are more restrictive than accommodative for growth. If China wants to support growth, it cannot tighten policies too much.”
Story continues
Stocks have stumbled into the new year, falling in all but one session. The MSCI China Index has plunged around 20% from its close on Oct. 7, as hopes that the economy will see a swift revival faded.
PBOC Dilemma
Meanwhile, the property slump at the heart of China’s economic slowdown has shown little sign of abating, with major developers starting 2025 facing liquidation petitions, sliding share prices and mountains of debt.
The grim mood is a far cry from last autumn, when a string of monetary policy stimulus, and promises of fiscal steps, saw stocks stage an epic rally. The yuan was also at the strongest in over a year in late September. The market has been on downtrend since then, and fiscal measures have been piecemeal at best.
While the economy’s weakness warrants further monetary easing, the PBOC is in a bind. It’s faced with the task of supporting growth while at the same time, preventing the yuan from depreciating too fast and risking capital outflows.
The PBOC has skipped a much-anticipated cut to banks’ reserve requirement ratio since September and instead used other tools to inject liquidity into lenders. Some economists including those at Nomura Holdings Inc. have pushed back their forecasts for the next interest rate cut to later this year.
Uncertainties over the pace of Federal Reserve rate cuts are also constraining the PBOC’s room for maneuver. China’s policymakers are likely reserving their stimulus firepower to deal with any shock from US tariff increases when Donald Trump takes office later this month.
“Investors should stay defensive in the first quarter, and I think fast money might stay away in the first quarter and wait for things to be clearer, especially Trump’s tariff,” said Xin-Yao Ng, a Singapore-based investment director at abrdn Plc.
–With assistance from Iris Ouyang, Betty Hou, Zhu Lin, Yujing Liu and David Hall.
Most Read from Bloomberg Businessweek
©2025 Bloomberg L.P.