If over half of global GDP growth for the last decade relied on China, what is this telling you about the current macro environment?

What a difference a year makes when you are trading Chinese bonds.

Twelve months ago, dealers in China’s $2 trillion government debt market braced for a wipeout. Ten-year yields surged above 4% amid worries overly loose monetary policy might fan inflation. That, in turn, fueled fears of a wave of corporate defaults. Now, the opposite risk may be at play: deflation.

It is premature to say China is coursing toward a Japan-like falling-prices drama. Yet recent data warrant a moderately sized blip on investor radar screens. In November, consumer prices slid 0.3% from a month earlier, while producer prices fell 0.2%. On a year-on-year-basis, producer prices advanced just 2.7% in November, the weakest reading in two years (consumer prices are up 2.2% from a year ago).

Bond traders are taking no chances. Earlier this week, 10-year yields dropped to 3.27%, the lowest in more than 18 months. And, really, they have every reason for gloom considering the headwinds blowing China’s way — and how they may intensify next year.

Donald Trump’s trade war is the main source of turbulence. Odds are, the U.S. president has just started. His yearslong dream of halting China’s rising dominance collides with a White House in crisis — and desperate to change the subject from seemingly-ubiquitous Trump-linked legal probes.

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