Hang Seng, Shanghai Composite on edge as China bond yields crash

The Hang Seng and Shanghai Composite indices have retreated this month as traders focus on the falling Chinese bond yields. The Shanghai Composite Total Return Index retreated to CNY 3,570, its lowest level since October 18 and 12.6% below its highest level in 2023. 

Similarly, the Hang Seng fell to H$19,160, its lowest point since November last year and 17.5% below the 2024 high. So, how will the two indices trade as China bond yields fall?

China bond yields are crashing

The continued plunge of Chinese bond yields has been one of the most popular themes in social media over the past few months. 

According to TradingView, the yield of the 30-year government bonds has dropped from 4.026 in 2020 to 1.80%. Similarly, the 10-year yield fell from 3.41% to 1.60%, while the five-year dropped to 1.4% from 3.3%.

These numbers continued falling after China published its inflation numbers on Wednesday. According to the statistics agency, the headline Consumer Price Index (CPI) rose slightly from minus 0.6% to 0.0%, but fell from 0.2% to 0.1% on a YoY basis. The producer price index dropped by 2.3% in December.

Low inflation is usually a good thing to most people. However, it is usually a sign that demand is fading, forcing companies to slash their products. 

These numbers also explain why the Chinese yuan has plunged and is nearing its lowest level in months.

In theory, low bond yields should boost stock prices as many investors rotate from bonds to equities. They also signal that the central bank is prepared to deliver more cuts.

Most analysts expect the PBoC to start cutting interest rates this year. Officials also confirmed that to the FT, saying their response will involve at least two cuts and other non-interest rate policies. In a note, a Goldman Sachs analyst said:

The Hang Seng and Shanghai Composite Indices also falling as traders anticipate more trade tensions between the US and China. Citi analysts expect that the US's huge tariffs may affect about 6% of Chinese exports.  

Hang Seng index analysis

The daily chart shows that the Hang Seng index has been in a steady downtrend in the past few months. After peaking at H$23,210 on October 7, it has dropped to H$19,150, its lowest point since November 26. It has dropped to the 50% Fibonacci Retracement point at $18,990. 

The Hang Seng index has formed a small head and shoulders pattern, while the MACD and the Relative Strength Index (RSI) have all pointed downwards. Therefore, it will likely continue falling as sellers target the next point at $18,000. 

Shanghai Composite Index analysis

The hourly chart shows that the Shanghai Composite index has also been in a strong downtrend in the past few days. It dropped from CNY 3,888 on December 10. It has moved slightly below the 50-hourly moving average. The index has formed a bearish flag pattern, pointing to more downside to the support at CNY 3,400.