China’s benchmark 10-year government bond yield has dropped to a historic low of 2.16%, falling below a previous low despite recent rate cuts by the PBOC aimed at supporting the economy. This decline in yields likely reflects increasing pessimism about China’s local demand outlook, and looking at the data, it is easy to see why.

Chinese export prices surged from nearly -10% year-over-year at the start of the year but have since shown a decline, according to recent data. Concurrently, freight rates have risen in recent months, raising concerns about potential increases in goods prices in Western markets. However, if the downward trend in Chinese export prices persists, it could partially counterbalance the rising freight costs.

On the commodity side, things are not looking optimistic either.

Copper prices have fallen after an extreme build-up in positioning in the spring. Given the massive export numbers from China, it seems likely that more weakness is ahead once this hits Western markets. Maybe the divergence between copper and steel in China wasn’t just about the EV story after all.

Further evidence of weakness in Chinese demand is seen in the crack spread swaps between Dubai crude oil and Singapore gasoil, which are now trading around early 2023 levels — that time when China was coming out of the lockdown and we all wanted to believe in the ‘China Rebound Story’. Between 2016 and 2019, the average price of crude oil was approximately $60, with refiners earning about $15 per barrel.

Since 2023, the average crude oil price has increased to around $80, boosting refiners’ margins to $25. Currently, these margins have decreased to $17, despite crude oil being $20 more expensive per barrel compared to pre-COVID prices. This indicates that refiners are struggling to enhance their profit margins despite the higher cost of crude oil.

Chart 1.a: Chinese export prices taking a turn downwards