China Government Bond 2Y

China announced measures on the 29th centred on cutting some central bank lending rates and subsidising mortgage interest payments, aimed at shoring up a slowing economy. The People's Bank of China said in a statement that it would lower the rate on pledged supplementary lending by 25 basis points, cutting the one-year PSL rate to 1.5% from 1.75%, and would expand the scope of PSL to support investment in water conservancy, power grids, computing, telecommunications, urban pipelines and logistics networks. The central bank also raised its relending quota for supporting scientific and technological innovation and technological upgrading by 200 billion yuan to 1.4 trillion yuan, its relending quota for agriculture and small and medium-sized enterprises by 500 billion yuan to 4.85 trillion yuan, and its relending quota for private enterprises by 300 billion yuan to 1.3 trillion yuan. The central bank said it would maintain ample liquidity and guide interest rates to a level that supports the real economy. Separately, the central bank and financial regulators announced on the 29th that, starting October 1, they will subsidise interest payments on new mortgages nationwide for first-time homebuyers who meet certain conditions. According to a statement from the Ministry of Finance, the government will cover 1 percentage point of annual interest on eligible loans for up to five years, with eligible borrowing capped at 1 million yuan per household and eligible homes limited to those with a floor area of 120 square metres or less and a purchase price of 1.5 million yuan or less per household.

The yield spread between 10-year US and Chinese government bonds has surged to 312 basis points, approaching the record high of approximately 315 bps set early last year, amid divergent monetary policies. The 10-year US Treasury yield has risen to 4.81%, its highest level in nearly three years, while the Chinese bond yield has held steady at 1.69%. This movement increases the risk of capital outflows from China, as Chinese assets become less attractive compared to US assets. However, analysts such as Jeffrey Zhang from Credit Agricole CIB believe that the risk of rapid capital outflows remains limited, given China's stable fiscal and monetary policies, and that foreign investors' holdings of Chinese bonds account for only 4.6% of the total market. Meanwhile, the yuan has appreciated by nearly 4% since the start of the year and is trading at around 6.72 yuan per dollar.

The People's Bank of China has conducted a survey of mutual funds regarding their long-term bond investments, according to people familiar with the matter. The central bank mainly examined 10-year and 30-year bonds, and also looked into duration mismatch risks in mutual funds' assets under management, the people said. Another source said the PBOC also asked about recent market volatility and how fund managers view appropriate yield levels for long-term bonds. Long-term bond prices have risen over the past month, with the 10-year yield hitting its lowest level since July 2025 this week. On the 20th, the 10-year yield stood at 1.68% and the 30-year yield at 2.13%, both the lowest since September 2025, while the spread between 1-year and 10-year yields narrowed to 48 basis points.

The Chinese government is preparing a new round of fiscal measures for the rest of the year to stimulate business and consumer credit, as China's economy is likely to grow below the 4.5 to 5 percent target set by the government for this year. Liao Min, Vice Minister of Finance of China, said today that the Chinese government is studying and drafting a new set of coordinated fiscal and financial measures, which will be rolled out gradually in the second half of this year. These measures have been expanded further since August 1, making more types of loans eligible for interest subsidies, especially loans for small and medium-sized businesses and for consumers. China's Ministry of Finance will issue guidelines for local government bond issuance, speed up budget disbursement, and strengthen oversight of areas where spending has been slow, in order to push projects to start more quickly. The Chinese government also plans to take serious steps to curb new hidden debt, and will systematically review tax reduction measures announced in the past, with the goal of ending or adjusting some of them to address fragmented policies and reduce distortions in market mechanisms.

China's long-dated government bond yields have kept falling, bucking a global bond selloff that has pushed yields elsewhere to multi-year highs. The 30-year yield dropped to its lowest since November last year, narrowing the spread between 10-year and 30-year bonds to 50 basis points, near the tightest since February this year. Open interest in 30-year bond futures hit a record high on Friday, reflecting heavy speculation that Chinese yields will fall further. Analysts at Zhongtai Securities view the narrower 10-30 year spread as offering the best risk-reward balance for the rest of this year and expect the 30-year yield to fall to 2%. Weak Chinese economic data for July, with industrial output, retail sales and investment all missing expectations, has reinforced bets that Beijing will ease policy further. Investors have piled into longer-dated bonds, reflecting a view that China's economy may face a prolonged slowdown, in contrast with many countries where interest rates remain high. The 10-year US Treasury yield hit its highest since 2025 this week, while long-dated bonds globally have come under selling pressure. Analysts at Shanze Fund explained that the recent bond rally has been driven mainly by short-term trading books rather than long-term investment portfolios. If the market expects further monetary easing in China and liquidity remains loose, the spread between 10-year and 30-year yields could narrow toward 40 basis points. Chinese government bonds have returned 2.6% since the start of the year excluding currency effects, putting China third among major bond markets. The 30-year yield held at 2.15% on Wednesday, near the nine-month low reached the previous day. Demand for bonds remains strong, with a 20-year special government bond auction today drawing a record bid-to-cover ratio.

Chinese companies slowed their foreign currency sales in July, with net sales falling to an eight-month low, signaling that a key support for the yuan is fading amid a weak domestic economy. Net foreign currency sales by Chinese banks on behalf of clients fell by more than half from June to 25.2 billion dollars, the lowest level since November 2025, according to data from the State Administration of Foreign Exchange. Meanwhile, the yuan has strengthened only 0.7 percent against the dollar since the end of June, after surging 3 percent in the first half of the year. Geoffrey Yu, senior strategist at BNY, said people are willing to hold foreign currencies for carry trades because yuan returns are low. The yield on China's 10-year government bonds fell below 1.70 percent for the first time in about a year this month. China's central bank has also tried to temper expectations for yuan appreciation by setting its daily reference rate significantly weaker than market forecasts since late July. The balance of new foreign exchange forward contracts swung back to a net foreign currency purchase of 4.7 billion dollars in July, tilting toward the dollar over the yuan for the first time since January 2025. Wang Yifeng, chief financial industry analyst at Everbright Securities, said dividend payments supported foreign currency demand in July, but that demand may ease after August.

China's central bank injected a net 348 billion yuan of liquidity through overnight reverse repo operations on Friday, August 14, marking the first time it has used this tool mid-month to meet funding demand from tax payments. The PBOC conducted overnight reverse repos worth 349 billion yuan, or about 51.7 billion US dollars, and offset 1 billion yuan of maturing seven-day reverse repos, resulting in a net injection of 348 billion yuan. Previously, the PBOC had used overnight reverse repos only near the end of June and July, after Governor Pan Gongsheng announced an expansion of short-term liquidity management tools at the Lujiazui Forum in June. Frances Cheung, head of foreign exchange and rates strategy at Oversea-Chinese Banking Corp., said the amount was not particularly large and the PBOC's stance had not changed significantly, with the focus on reducing volatility rather than injecting excess funds. The PBOC also planned to conduct outright reverse repos worth 1 trillion yuan on the same day, but will fully offset maturing contracts this week, so there will be no additional net injection. The yield on China's 10-year government bonds fell about 1 basis point to 1.68 percent, the lowest since July 2025, reflecting expectations that liquidity will remain accommodative.

The People's Bank of China indicated on the 12th that it will maintain a moderately accommodative monetary stance and introduce effective additional measures as needed. In its quarterly monetary policy implementation report, it stated that while maximizing the use of existing policies, it will swiftly formulate and introduce additional measures, strengthen counter-cyclical adjustments to respond to economic cycles, and promote the expansion of domestic demand. It did not explicitly mention cuts to policy interest rates or the reserve requirement ratio. It pointed out that the domestic economy faces an imbalance of robust supply but weak demand, and against the backdrop of second-quarter 2026 GDP growth coming in at 4.3 percent year-on-year, below the lower bound of the government's target, it expressed the intention to strengthen coordination between monetary and fiscal policies.

Asian stock markets traded mixed on Monday, caught between a sharp sell-off in semiconductor stocks and positive overnight momentum from Wall Street. The benchmark KOSPI fell 4.89% to around 6,300, dragged down by massive sell-offs in semiconductor giants SK Hynix and Samsung Electronics, which both dropped more than 7%. Japan's Nikkei fell 1.16% toward 63,000, while the broader Topix Index declined 2.5% to 3,902. China's Shanghai Composite fell 0.77% to 3,813, and the Shenzhen Component declined 0.8% to 13,467, as weak manufacturing data overshadowed fresh policy support signals from Beijing. The People’s Bank of China said in a statement on Sunday that it will continue monetary support in the second half of 2026, pledging to maintain ample liquidity and adjust policy tools as needed. Hong Kong's Hang Seng rose 0.05% to 25,978, and India's Sensex rose 0.78% to 78,661, extending gains for a fourth straight session and reaching its highest level since April 21. Australia's ASX 200 rose 0.16% to 8,950. In commodities, crude oil dropped more than 5% to below $80 per barrel after President Donald Trump confirmed peace talks with Iran would resume, while gold climbed above $4,050 an ounce.

The People's Bank of China has indicated it will adjust monetary policy tools in a timely manner and promote the issuance of panda bonds. At a working meeting to set the policy direction for the second half of the year, it confirmed it will continue a moderately accommodative monetary policy and maintain ample liquidity. It will also provide financial support to resolve debt risks of local government financing vehicles and promote their market-oriented transformation. Furthermore, it outlined plans to strengthen cross-border and offshore financial services in Shanghai and solidify Hong Kong's status as an offshore renminbi trading hub.