Chinese policymakers are holding back from rolling out the big guns of monetary stimulus despite further signs of weakening of the economy, including July new loans plunging 36 percent to 1.06 trillion yuan (HK$1.18 trillion), short of the expected 1.25 trillion yuan.
It is believed that the Chinese government wants to keep options in reserve as the trade standoff with the United States risks becoming a global currency war.
China's benchmark government debt is the closest in years to yielding just 3 percent. Escalation in global trade tensions since April have put a damper on sentiment, helping spur a rally in Chinese sovereign bonds.
The yield on the country's 10-year debt is down about 40 basis points since a peak in April, falling as low as 3.03 percent on Friday. It hasn't traded below the 3 percent threshold since November 2016.
China's foreign exchange regulator said yesterday it does not expect disorderly depreciation of the yuan despite the impact from external factors such as trade friction.
Goldman Sachs Group said on Sunday that fears of the US-China trade war leading to a recession are increasing and that Goldman no longer expects a trade deal between the world's two largest economies before the 2020 US presidential election.
"We expect tariffs targeting the remaining US$300 billion of US imports from China to go into effect," the bank said in a note sent to clients.
Goldman said it lowered its fourth-quarter US growth forecast by 20 basis points to 1.8 percent on a larger than expected impact from the trade tensions.
Chinese stocks might be about to face more headwinds. Goldman Sachs cut its earnings-per-share estimates for the MSCI China Index and lower potential for valuations to rise, while JPMorgan Chase & Co says investor flows show that the country's stocks are overbought.
While China's equities are likely overbought, the yuan appears to be oversold, JPMorgan said, citing a steady rise in long dollar/short yuan positions since mid-2018. The strategists also noted that Chinese onshore bonds should benefit from increased expectations of rate cuts by the People's Bank of China in an escalation scenario.