China’s PBOC Liquidity Injections and Implications for Fixed-Income Markets: Assessing the Sustainability of Accommodative Monetary Policy Amid Growing Fiscal Pressures

The People’s Bank of China (PBOC) has embarked on an unprecedented liquidity expansion in 2025, injecting over CNY10 trillion ($1.5 trillion) into money markets to stabilize asset prices and support government borrowing amid a deteriorating fiscal outlook [1]. By August, the central bank had deployed 600 billion yuan in one-year medium-term lending facilities and reverse repos, the largest such injection since January, to counteract a spike in bond yields following a 30-year government bond auction [2]. These measures reflect a strategic pivot toward targeted liquidity support, avoiding broader easing tools like rate cuts or reserve requirement reductions to mitigate deflationary risks and asset bubbles [2].

China’s fiscal pressures, however, are intensifying. Fiscal revenue growth is projected to stagnate at 0.1% in 2025, driven by weak tax collections and collapsing local government land sales due to property sector adjustments [2]. The central government’s fiscal deficit has expanded to 4% of GDP, while broader public sector deficits—encompassing local governments and special-purpose bonds—now approach 9.9% of GDP [3]. Total social financing reached RMB430.2 trillion by June 2025, equivalent to 309% of GDP, raising concerns about debt sustainability and misallocated investments [3]. To address these challenges, the PBOC has prioritized liquidity injections over aggressive rate cuts, aiming to stabilize bond markets while maintaining a stable yuan exchange rate [1].

The impact on fixed-income markets has been profound. PBOC interventions have suppressed 10-year government bond yields to near 1.65%, flattening the yield curve and reducing borrowing costs for the government [4]. However, smaller banks face growing exposure to sovereign debt, and global investors are wary of “Japanification” risks—prolonged low yields and policy inconsistencies—threatening bond returns [1]. The PBOC’s reliance on targeted tools, such as cross-currency repos and re-hypothecation, has improved short-term liquidity but may not address deeper structural issues like overcapacity in electric vehicles and solar panels [3].

Sustainability concerns loom large. Experts warn that the PBOC’s accommodative stance could exacerbate debt accumulation and asset-price bubbles if fiscal reforms lag [5]. A RMB14.3 trillion local government debt restructuring plan, including a RMB6 trillion one-off resolution, aims to alleviate fiscal pressures, but its effectiveness remains untested [2]. Meanwhile, the central bank’s modernization of its monetary framework—shifting from one-year MLFs to seven-day OMOs—has narrowed interest rate corridors but left transmission mechanisms to the real economy unclear [5].

For fixed-income investors, the path forward is fraught with uncertainty. While accommodative policy may prop up bond markets in the short term, structural fiscal weaknesses and geopolitical risks—such as U.S. tariff threats—could trigger volatility [6]. The PBOC’s strategic patience, balancing growth support with financial stability, may yet prove resilient, but long-term sustainability hinges on structural reforms to rebalance China’s economy toward consumption and innovation [5].

Source:
[1] The liquidity map points to China [https://www.atonra.ch/research/the-liquidity-map-points-to-china]
[2] PBOC looks to Ease Pressure on Bond Market With Cash [https://www.bloomberg.com/news/articles/2025-08-25/china-ramps-up-longer-term-cash-boost-with-bonds-under-pressure]
[3] What Will China's Economic Policy Look Like in H2 2025? [https://www.china-briefing.com/news/chinas-economic-policy-h2-2025/]
[4] The PBOC's Struggle to Stabilize China's Bond Market [https://www.ainvest.com/news/pboc-struggle-stabilize-china-bond-market-implications-global-investors-navigating-deflation-policy-interventions-2507/]
[5] Navigating China's economic challenges: a difficult task for [https://www.scoperatings.com/ratings-and-research/research/EN/179083]
[6] China's economic and industry outlook for 2025 [https://www.deloitte.com/cn/en/services/consulting/perspectives/deloitte-research-issue-95.html]