(Bloomberg) — China’s longstanding two-speed economy is creating ever greater divergence in its financial markets, with stocks and bond yields sinking to more than one-year lows this month while the yuan has powered higher.
Markets are increasingly drawing a distinction between a weak domestic economy and a resilient export sector. This deepening divergence stands in sharp contrast to the narrative that took hold this time last year, when gains in stocks, bonds and the yuan fueled optimism that China was shedding its “uninvestable” label.
“There has been a disconnect, mostly due to the ongoing Chinese two-speed economy,” said Sophie Huynh, a fund manager at BNP Paribas Asset Management in London. Chinese stocks reflect weak domestic demand, “with consumption below policy targets and property still a drag,” she said.
“On the other side, the Chinese renminbi has totally disconnected from interest-rate differentials since the start of the year, thanks to the firm trade surplus, yuan internationalization and capital inflows,” she added.
The benchmark CSI 300 Index has now lost about 6% in 2026, while bond yields have tumbled as investors respond to signs of weakness in key areas of the economy, including property, consumer spending and many traditional industries. The yuan meanwhile has climbed to its strongest level against the dollar in more than three years supported by robust exports.
Many investors are coming to the view that the divergence will persist. Confidence in any broad rebound in consumption, property and private-sector activity remains limited, especially as Beijing’s latest stimulus measures and the outcome of this month’s meeting between US President Donald Trump and his Chinese counterpart Xi Jinping fell short of expectations. That view is supported by recent data showing export growth accelerated in August, even as consumer spending and investment languished.
The CSI 300 Index is among the worst-performing major equity benchmarks this year, even as markets benefiting from the global artificial-intelligence boom have surged. South Korea’s Kospi and Taiwan’s Taiex have both gained more than 60% during the period.
Reed Capital Partners is among the investors that are underweight on Chinese shares.
“The government has vowed several times this year to boost the economy, but the marginal gains have been quite anemic,” said Gerald Gan, chief investment officer at the firm in Singapore. “Our portfolio performance has been dragged down by our China exposure so far this year, and we have run out of patience for the time being, particularly when compared with the continued strength in US equities.”
A recent Bank of America survey showed that fund managers remain underweight on Chinese equities, ranking the nation as one of their least favored Asian markets.
Meanwhile, traders are piling into Chinese government bonds, in a sign that they foresee prolonged economic softness.
China’s 10‑year bond yields dropped to around 1.66% this week, their lowest level since July last year, while open interest in 30-year bond futures surged to a record high on Wednesday.
“Looking at the macro data, the lack of borrowing demand, even in such a low-yield environment, stands out,” said Dayeon Hong, an Asia-Pacific strategist at Natixis SA in Hong Kong. “This indicates extremely weak sentiment regarding domestic economic activity, a reality currently reflected in the financial markets.”
The yuan is Asia’s best-performing currency against the dollar this year and is heading for a seventh straight quarterly gain.
It is also appreciating against a basket of its peers. A Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 25 currencies of China’s trading partners, has gained more than 5% this year.
“The strengthening of the yuan is related to strong exports, rapid forex reserve buildup and overseas Chinese capital flowing back to China,” said Hao Hong, chief investment officer at hedge fund Lotus Asset Management in Hong Kong.
The yuan’s gains are starting to concern the central bank. The People’s Bank of China said it wants to “prevent the ‘herd effect’ and the self-reinforcement of irrational expectations” in the foreign-exchange market, according to a statement issued last week.
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