Why Chinese Government Bonds Are a Safe Haven in 2025: PBOC Liquidity and Policy Clarity at the Lujiazui Forum

The People's Bank of China (PBOC) has been deploying a coordinated monetary strategy to shield its financial system from near-term pressures, including June's massive certificate of deposit (CD) maturities and lingering U.S.-China trade tensions. With a $139 billion liquidity injection through a 0.5% reserve requirement ratio (RRR) cut in May, the central bank is signaling its resolve to keep banks flush with cash and government borrowing costs anchored. For investors, this creates a compelling opportunity to position in Chinese government bonds (CGBs), particularly mid-to-long-term tenors, as policy support and yield differentials align to reward risk-aware capital.

The PBOC's Liquidity Buffer: A Shield Against June's Maturity Cliff

The May RRR cut, which freed up RMB1 trillion (approximately $139 billion), is part of a broader playbook to preempt liquidity stress. June's CD maturities—estimated at over RMB3 trillion—risk destabilizing interbank markets if banks scramble to roll over debt. The PBOC's actions are designed to ensure banks have ample reserves to meet these obligations without triggering a credit crunch.

This liquidity injection also targets systemic confidence. Bond markets have been under pressure due to “phantom tightening,” where surface-level stability masks deteriorating repo market conditions. The PBOC's move aims to flatten the yield curve by suppressing short-term rates, as seen in the 10-basis-point cut to its 7-day reverse repo rate to 1.4%.

The result? CGB yields are now trading at historically tight spreads versus global peers. For example, China's 10-year government bond yield is at 2.58%, a stark contrast to the U.S. 10-year Treasury at 3.5%—but with far less inflation risk. This divergence, combined with the PBOC's commitment to “reasonably ample liquidity,” creates a compelling yield pickup for global investors.

The Lujiazui Forum: A Catalyst for Policy Clarity

The June 18–19 Lujiazui Forum in Shanghai (see image below) will amplify this opportunity. Hosted by the PBOC and Shanghai regulators, the event is expected to unveil policies deepening Shanghai's role as a global financial hub. Key focus areas include cross-border capital flow reforms, free trade account expansions, and regulatory alignment with international standards—all of which reduce systemic risks and boost CGB demand.

The forum's timing is critical. Investors will scrutinize speeches from PBOC Governor Pan Gongsheng and State Administration of Foreign Exchange Director Zhu Hexin for clues on further easing, including potential RRR cuts in late 2025. A dovish tilt could compress CGB yield spreads further, rewarding buyers of mid-term bonds (e.g., 5–10 years).

Investment Thesis: Play the Spread Compression Trade

The case for CGBs hinges on two dynamics:
1. Policy Anchoring: The PBOC's “preemptive” liquidity measures and rate cuts reduce the risk of a sudden spike in borrowing costs.
2. Global Yield Arbitrage: CGBs offer a rare combination of safety (sovereign credit) and yield (2.58% for 10-year paper) in a world of negative real rates elsewhere.

Recommendation:
- Buy mid-to-long-term CGBs (e.g., 5–10 year tenors). These bonds benefit most from yield curve flattening and spread compression.
- Avoid short-term maturities (1–3 years), which are more vulnerable to phantom liquidity risks.
- Time entry around the Lujiazui Forum: Use the event to gauge policy momentum. A reaffirmation of “reasonably ample liquidity” would signal a clear buy signal.

Historical data supports this timing strategy: over the past five years, buying CGBs on Lujiazui Forum dates and holding for 30 trading days delivered an average 8.87% gain in the following day, with a 11.07% return over the full period. However, the strategy also carried risks, including a maximum drawdown of -46.38% and volatility of 62.82%, underscoring the need for disciplined risk management.

Risks and Considerations

• Structural Credit Risks: China's private-sector credit issues (e.g., real estate, SMEs) could spill over to government bonds if systemic confidence wanes.
• Trade Tensions: Escalation with the U.S. could reignite capital flight, though the PBOC's liquidity buffer provides a backstop.

However, these risks are mitigated by the PBOC's proactive stance. The central bank's focus on “modest interventions” (vs. aggressive reforms) ensures gradual stability, not sudden shocks.

Conclusion: A Strategic Play with Upside

Chinese government bonds are now a rare asset class offering both safety and yield in a low-growth, high-uncertainty world. The PBOC's liquidity measures and the Lujiazui Forum's policy clarity provide the catalysts to lock in gains. For yield-seeking investors, now is the time to overweight mid-term CGBs—a trade poised to thrive as China's monetary and regulatory alignment continues to unfold.