(Bloomberg) -- Funding costs are sliding across Chinese markets as Beijing attempts to revive consumer and business spending to stave off deflation pressures.

Loans growth sank to a record low in January even after the People’s Bank of China cut its policy rate twice in the past year. With a lack of confidence spurring consumers and corporates to hoard cash, it’s raising concerns among some analysts that monetary policy will fail to stimulate the economy — potentially the first signs of a liquidity trap.

Yields on benchmark government bonds have dropped to the lowest since 2002, while policy-sensitive short-term interest rate swaps are close to levels last seen during the pandemic in 2020. Policymakers gather next week for the country’s annual parliamentary meetings.

“Real economic activity is increasingly not responsive to monetary injection,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “All we can say is that the risk of liquidity trap is looming. As prices fall, households and corporates would choose to delay spending and save.”

Stubborn Savers

In a sign that monetary policy transmission into economic activity is weakening, Chinese household savings have expanded in tandem with money supply in the past year. Meantime, the country’s loan growth fell to a record low in January. Residents are reluctant to take out mortgages as the outlook for income and home prices is uncertain. Bank are wary of lending to developers as many have defaulted.

Yield Decline 

A rally in Chinese sovereign bonds has accelerated in recent weeks, sending the yield on the benchmark 10-year note this week to about 2.35%, the lowest since 2002. In a sign that haven bids are rising, the yield on the government’s 30-year debt has dropped 11 basis points in the past five sessions, the fastest pace for any such period since August 2022, data compiled by Bloomberg show.

Spread Compression

Corporate bond financing has also become a lot cheaper. Yield premiums on five-year notes with ratings of AA shrank to 70 basis points this week, the tightest since 2007, according to Bloomberg-compiled data. The coupons on subordinated debt issued by Chinese banks have averaged 2.8% so far this year, marking the lowest since data compiled by Bloomberg became available in 2014.

Cheap Swaps 

The dollar-yuan pair’s 12-month forward points, a gauge of yuan’s funding costs relative to the greenback in the FX derivatives market, dropped further into negative territory in February to approach the lowest since 2008. The one-year onshore interest rate swap fell toward a four-year low, reflecting increased bets on further monetary easing.

--With assistance from Shuiyu Jing, Tom Hancock and Zheng Wu.

(Updates with more data, a new chart and analyst quotes)

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