China MOF vows smooth operation of govt bond market

China MOF vows smooth operation of govt bond market

China’s Ministry of Finance (MOF) has reassured investors and financial professionals that the government bond market will operate smoothly, despite recent market volatility. The MOF’s statement comes in response to a bond selloff that has raised concerns about potential destabilization of financial markets.

On July 25, 2025, the People’s Bank of China (PBOC) injected 601.8 billion yuan ($84 billion) of short-term cash into the financial system via reverse repurchase agreements, the largest daily net injection since January. This move was intended to stem a bond selloff and stabilize the market [1].

The selloff has been driven by a combination of factors, including a recent drop in longer-dated notes, a US trade truce, and Beijing’s bid to tackle deflation. These factors have eroded demand for debt securities, leading to increased redemption pressure among fixed-income investors. The redemption pressure among fixed-income investors climbed to the highest level since October 2024 on Thursday [1].

The MOF’s assurance of smooth operations comes at a time when local funds have withdrawn a net 120 billion yuan from bonds in three sessions through Thursday, according to Huatai Securities. More than 90% of 3,182 mutual bond funds that have invested in medium to long-term debt in China recorded losses from Monday to Wednesday [1].

The MOF’s commitment to maintaining market stability is crucial, as the rotation of funds out of bonds could push up borrowing costs for the real economy. The average yield on AAA-rated three-year corporate bonds has climbed 11 basis points so far this week to head for the biggest weekly jump since February [1].

In addition to the PBOC’s liquidity injections, the MOF has also been active in the primary market. The finance ministry sold 30-year special sovereign notes at an average yield of 1.97% on Thursday, the highest level since March in auctions on the tenor [1].

The MOF’s efforts to ensure the smooth operation of the government bond market are part of a broader strategy to manage economic challenges. China’s local governments issued a substantial amount of special bonds in the first half of 2025, totaling 2.16 trillion yuan, to bolster their fiscal positions [2].

The MOF’s reassurance comes as Chinese government bond futures are poised for their steepest weekly decline in 10 months, implying higher bond yields. The rally in equity and commodity markets has drawn investors' interest away from fixed income, contributing to the selloff [3].

The MOF’s commitment to maintaining market stability is crucial for investors and financial professionals, who are closely monitoring the fiscal policies of China's local governments and their impact on the broader economy. The issuance of special bonds in the first half of 2025 is a critical indicator of the government's strategy to navigate economic headwinds and maintain fiscal stability [2].

References:
[1] https://finance.yahoo.com/news/pboc-moves-steady-bond-market-051339781.html
[2] https://www.bloomberg.com/news/articles/2025-07-25/pboc-moves-to-steady-bond-market-as-downward-spiral-worries-grow
[3] https://www.reuters.com/world/china/shanghai-bourse-gives-bond-investors-taste-high-yields-with-new-framework-2025-07-25/