China's economy is widely expected to grow by more than 5% this year.
China bonds rallied Monday with the 10-year yield dropping below the key psychological level of 2% to hit a multi-decade low, amid expectations that Beijing could expand its stimulus measures to shore up the economy.
Yields on China's 10-year government bond, which move inversely to prices, fell to 1.9636% on Monday, data from LSEG showed, marking its lowest level in 22 years. 30-year bond yields dropped to 2.164%.
"The bond rally was mainly driven by expectations of a further cut to the reserve requirement ratio for commercial lenders," Tommy Xie, head of Asia macro research at OCBC Bank, said in a note on Monday, as well as "supportive liquidity condition and still weak economic fundamentals."
The declines in yields came after the People's Bank of China announced last Friday that in November it had injected 800 billion yuan into the banking system via so-called "outright reverse repo operations." That was ramped up from the 500 billion yuan injection in October.
The move was aimed at "keeping liquidity in the banking system adequate at a reasonable level," the official statement read.
Separately, the central bank also said it had purchased a net 200 billion yuan of government bonds in open market operations in November, aimed at "intensifying counter-cyclical adjustment of its monetary policy."
Chinese authorities have attempted to stem the bond market rally, fueled by investment piling into the safety of Chinese government bonds amid slowing economic growth and a lack of attractive investment options.
The PBOC has cautioned about the risks of destabilizing bubbles as investors chase government bonds while shunning more volatile assets. "The market is still pricing in some fiscal stimulus support early next year," Edmund Goh, investment director at abrdn, told CNBC.
"Without any meaningful fiscal stimulus, China will see the economy moving into a deflationary state," he added.
Chinese offshore yuan weakened by 0.45% on Monday to 7.2795 on the dollar.
PBOC Governor Pan Gongsheng said in a high-level meeting in November that authorities planned to maintain supportive monetary policy and indicated that RRR would be lowered by 25 to 50 basis points by year-end. He also suggested that seven-day reverse repo rate could be cut by another 20 basis-point before year's end.
"The resistance for further downside [on bond yields] may increase due to higher government bond issuance and upcoming major meetings," OCBC's Xie noted.
China is expected to hold closely-watched meetings by Politburo followed by an annual central economic work conference around mid-December where policymakers will set plans and growth targets for 2025. At these meetings, Beijing is likely to announce additional stimulus measures which may alter market dynamics and reduce scope for further declines in yields according to OCBC's Xie.
"Even though Chinese yields are now nearing 2%, spread with U.S. ten-year yields has actually tightened," Eugene Hsiao pointed out adding it's positive for Chinese equity flows. China's ten-year yield remains far lower than U.S.'s over four percent Treasury yield.