Is India the brand new previous China but? | USAEMALL.com

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We’ve already spent a lot of time gawping at the vanishing spread between Japanese and Chinese government bond yields, and its myriad implications.

Well, here’s another fixed income spread that says something interesting about the global economy today. Or at least something interesting about how investors see the global economy today.

Lo, the spread between India and China’s 10 year sovereign bond yields hit an 11-year high of 5.2 percentage points earlier this month, and remains near its highest ever levels.

The recent ballooning is mostly due to Chinese yields grinding lower and lower. Indian yields have actually fallen as well lately, due to expectations for rate cuts from the Reserve Bank of India, the surging US dollar, and last year’s inclusion into JPMorgan’s influential emerging market bond indices.

However, the economic outlook for India is lot more positive than it is for China. As a result, the inflation picture is also radically different, as Chetan Ahya, chief Asia economist at Morgan Stanley points out:

The difference is probably due to investors’ differing expectations for the real GDP growth and inflation outlook for these two economies . . . Expectations for both growth and inflation in India are higher as compared to China. India’s inflation expectations are probably closer to 4-5% while investors are expecting persistent deflationary pressures for China.

Trinh Nguyen, economist for emerging Asia at Natixis, adds that India has some tailwinds that China now lacks:

It is easier to grow when you have population growth, and when you have a lower base — India is only a US $4tn economy [China is $18tn]. Meanwhile China is facing a quadruple D of hurdles: deflation, demographics, debt and decoupling [with the US].

As a result, Indian bond yields have remained relatively high — the 10-year yield has dipped from above 7 per cent in the middle of 2024 to around 6.7 per cent right now — even as Chinese bond yields have puked hard.

In fact, the 10-year Chinese government bond yield is now only a whisker above 1.5 per cent, a figurative fixed income market howl that there’s a danger that deflation becomes entrenched. In a sign of how serious the situation is for China, its 30-year yield fell below that of Japan’s last year, and its 10-year yield is now only 0.4 percentage point lower than that of China.

The United Nations predicts that India will remain the fastest growing major economy in the world, forecasting GDP growth of 6.6 per cent in 2025, even Chinese economic growth slows to 4.8 per cent.

The whole India versus China thing seems to be becoming a bit of a narrative, with UBS recently releasing a 139-page tome that compares the two countries across a range of different macro and capital market metrics. Most notably, the report predicts that India could overtake China in MSCI’s equity weightings by as early as 2028.

Of course, it wasn’t that long ago that people were just as bullish on China . . .