In the complex landscape of economy and finance, the concepts of "wide currency" and "wide credit" play crucial roles in shaping the fiscal environmentWide currency is often considered the precursor to wide creditEvidence of this can be seen in the behavior of government bond yields, which typically trend downward before the onset of wide credit cyclesWhen the economy needs stimulation, central banks often employ wide currency strategies, which in turn affect government bond yields and overall market dynamics.

As China navigates its financial waters, recent data indicate a significant deviation from expected trajectoriesIn January, financial indicators from China surprised the market, indicating better-than-expected outcomesThis unexpected performance led to a general consensus that the arrival of wide credit policies would have a detrimental effect on the bond market

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Within the span of two trading days, the yield on the 10-year government bonds surged from 2.73% to 2.80%. Observers wonder—what lasting impacts will these wide credit measures have on the bond market? To explore this question, it’s helpful to reflect on China's historical experiences with wide credit cycles and their subsequent effects on macroeconomic environments and the bond market.

A reliable approach to gauging credit cycles encompasses several key indicators, notably the growth rates of credit and social financingHowever, accurate analysis of these indicators poses challenges, particularly as the People's Bank of China started releasing monthly social financing figures only in 2016, adjusting definitions in subsequent yearsAs a near alignment exists between the trends in credit and social financing growth, this analysis defaults to using the annual growth rate of loans from financial institutions as a proxy for measuring credit expansion.

Since 2008, China has witnessed five distinct cycles of credit expansion, each stemmed from unique causes

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The first cycle arose in the wake of the 2008 global financial crisisTo combat economic slowdown, the central bank implemented a series of interest rate cuts totaling 200 basis points for large financial institutions and 400 basis points for smaller ones, beginning in September of that yearThe launch of a massive economic stimulus package of approximately four trillion yuan fueled investments in real estate and infrastructure, effectively stimulating loans that surged dramaticallyThe loan balance growth rate soared from 14.7% in September 2008 to 34.44% by June 2009, accentuated by significant public sector borrowing.

The second cycle occurred during the European debt crisis in 2012, where China's economy faced unexpected deceleration, prompting a series of stimulus measures including interest rate cutsAs the government emphasized bolstering investment projects, most notably in infrastructure, the loan balance growth rate clinched a gradual increase, showcasing a response in fiscal policy akin to a well-timed drive in the face of global adversity.

In 2014, as economic growth rates hit a plateau, the third credit expansion emerged, directed by further interest rate reductions that aimed to catalyze lending amid a housing sector resurgence due to government policies

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Between October 2014 and October 2015, the loan balance growth rate steadily progressed, showcasing the ability of monetary policy to facilitate recovery.

The fourth cycle manifested during the turbulence of trade tensions between China and the United States in 2018. As the economic landscape began to bow under the weight of these pressures, the central bank utilized various tools to stimulate demandEnhanced focus on infrastructure spent at the local government level underpinned an uptick in lending, as economic policymakers sought to foster stability amid external uncertainty.

The fifth cycle emerged in response to the unprecedented challenges posed by the COVID-19 pandemic in 2020. The People's Bank of China took robust actions—reducing reserve requirements and interest rates, fostering an environment ripe for credit growth as policymakers launched initiatives such as special pandemic bonds aimed at preserving economic dynamism

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The loan balance surged, supported through the dual mechanism of expansive monetary policy and targeted fiscal initiatives—an impressive recovery in financial terms.

Reflecting on these cycles, a notable trend emerges: bond yields often depict a V-shaped recovery path during wide credit periodsGenerally, as the cycle initiates with wide currency expansion, bond yields descendDuring early wide credit phases, the yield on bonds may fluctuate or dipHowever, as economies stabilize and expectations shift towards recovery, government bond yields embark on an upward trajectory as credit environments mature.

Currently, in light of heightened economic pressures, the Chinese government's focus is on maintaining overall stability while buoyantly fostering growthIn late 2021, the Central Economic Work Conference reinforced this focus, asserting the necessity for fiscal measures to spearhead growth while promoting a stable lending environment

Despite an uptick in social financing and newly issued loans in January, these metrics suggest that although recovery indicators are visible, a full wide credit cycle has yet to materializeThis means the potential for additional bond yield declines still exists, though historical trends demonstrate that more established credit cycles often lead to an eventual stabilization or rise in yields.

Yet, unlike preceding cycles, this instance of credit expansion is met with stringent constraints to mitigate risks associated with local government debts while adhering to real estate sector guidelinesLocal projects strive to meet necessary returns, yet with limited available funding, efficacy continues to lagPotential infrastructure investments may fall short of reinforcing economic buoyancy effectively—exhibiting disparities compared to previous cycles.

In conclusion, while the present growth in loan balances marks the possibility of recovery, historical patterns hint that we remain in a softer phase of credit expansion