China's Coordinated Policy Moves Signal a New Bull Market for Bonds and Equities

China’s 2025 fiscal-monetary coordination framework represents a bold departure from conventional policy silos, signaling a strategic effort to stabilize markets and stimulate growth amid global trade tensions and domestic structural challenges. The People’s Bank of China (PBOC) and fiscal authorities have deployed a synchronized toolkit of liquidity injections, interest rate cuts, and targeted fiscal stimulus, creating a self-reinforcing cycle that has already begun to lift asset prices and restore investor confidence.

Monetary Policy: Liquidity Injection and Structural Support

The PBOC’s 10-point monetary package, unveiled in May 2025, epitomizes this coordination. A 0.5 percentage point cut in the reserve requirement ratio (RRR) injected RMB 1 trillion into the financial system, while structural refinancing tools expanded credit access for innovation-driven sectors, SMEs, and the housing market [1]. These measures were complemented by record-low seven-day reverse repo rates, reducing short-term borrowing costs and easing deflationary pressures [2]. According to a report by China Briefing, the PBOC also introduced novel instruments such as the Securities, Fund, and Insurance Swap Facility (SFISF) to directly stabilize equity markets, a move that has bolstered liquidity in capital markets and supported asset valuations [4].

Fiscal Policy: Debt-Fueled Stimulus and Regional Disparities

On the fiscal front, local governments issued ¥2.6 trillion in special-purpose bonds by mid-July 2025, funding infrastructure projects and public service upgrades [3]. This fiscal stimulus, combined with tax relief and employment subsidies, has driven a 5.0% year-on-year rise in retail sales, signaling improved consumer demand [2]. However, regional disparities persist. A study published in Springer highlights that Western China, with weaker private-sector participation and less advanced market institutions, experienced prolonged output declines and slower property price recoveries following contractionary monetary shocks compared to Eastern and Central regions [1]. Such heterogeneity underscores the challenges of implementing a one-size-fits-all policy in a geographically and institutionally diverse economy.

Market Impact: A Bull Market in Bonds and Equities

The combined fiscal-monetary interventions have catalyzed a market rally. The MSCI China index surged 21.3% year-to-date, while the yuan appreciated 6.8% against the U.S. dollar, reflecting restored confidence in China’s economic resilience [2]. For bonds, the PBOC’s tech innovation bond risk-sharing mechanism and expanded refinancing quotas have reduced risk premiums, driving down yields and increasing demand for government and corporate debt [1]. Meanwhile, the establishment of Central Huijin as a quasi-stabilization fund has further insulated equities from volatility, particularly in high-growth sectors like green technology and AI [3].

Risks and Long-Term Sustainability

Despite these gains, structural risks loom. Local government debt accumulation, exacerbated by aggressive bond issuance, threatens long-term fiscal sustainability [6]. Additionally, overcapacity in strategic industries such as robotics and green technology could dampen future growth if left unaddressed [2]. Global trade tensions, notably U.S. tariffs, remain a wildcard. As noted by JPMorgan analysts, even the most aggressive fiscal-monetary coordination may only partially offset the drag from elevated tariffs, with 2025 growth expectations revised downward to 4.5% [5].

Conclusion: A Delicate Balance

China’s 2025 policy framework demonstrates a sophisticated understanding of the interplay between liquidity, asset prices, and economic stability. By integrating monetary easing with fiscal stimulus, policymakers have created a favorable environment for both bonds and equities. Yet, the path forward requires careful calibration to avoid exacerbating debt vulnerabilities and sectoral imbalances. For investors, the current bull market offers opportunities but demands vigilance against emerging risks.

Source:
[1] China Unveils 10-Point Monetary Package to Stabilize Markets [https://www.china-briefing.com/news/china-10-point-monetary-package-market-stabilization/]
[2] China's Policy-Driven Rally: A Self-Reinforcing Cycle for... [https://www.ainvest.com/news/china-policy-driven-rally-reinforcing-cycle-assets-growth-2509/]
[3] What Will China's Economic Policy Look Like in H2 2025? [https://www.china-briefing.com/news/chinas-economic-policy-h2-2025/]
[4] China's Monetary Stimulus. Aggregate and Structural... [https://www.cepweb.org/chinas-monetary-stimulus-aggregate-and-structural-implications/]
[5] China Outlook: Can China Make It in 2025? [https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/china-outlook-can-china-make-it-in-2025]
[6] The Coordination of Monetary and Local Government Fiscal Policies [https://www.mdpi.com/2071-1050/17/16/7555]