On October 27, during the opening ceremony of the 2025 Financial Street Forum, Pan Gongsheng, Governor of the People's Bank of China (PBoC), addressed the central bank's operations in buying and selling government bonds in the open market. He noted that last year, in line with the directives of the Central Financial Work Conference, the PBoC initiated operations for buying and selling government bonds in the secondary market. This move is a key step in enriching the central bank's monetary policy toolkit, enhancing the financial functions of government bonds, establishing the yield curve of government bonds as a pricing benchmark, and fostering greater coordination between monetary and fiscal policies. It is also beneficial for the reform and development of China's bond market and for improving the market-making and pricing capabilities of financial institutions. In practice, the PBoC has flexibly carried out both buying and selling operations of government bonds, taking into account the need for base currency issuance, the supply and demand of the bond market, and changes in the yield curve. This approach ensures the smooth transmission of monetary policy and the stable operation of financial markets. Pan further mentioned that, at the beginning of this year, given the significant pressure from the imbalance between supply and demand in the bond market and the accumulation of market risks, the PBoC suspended its government bond operations. Currently, with the overall bond market running smoothly, the PBoC plans to resume government bond buying and selling operations in the open market.
In fact, the central bank has mentioned multiple times that it plans to resume government bond trading operations. In September of this year, the Ministry of Finance and the PBoC held a joint working group meeting to discuss a range of topics, including the operation of the financial market, government bond issuance management, central bank government bond trading operations, and the improvement of the offshore RMB government bond issuance mechanism. This was seen as a signal that the central bank was preparing to resume government bond trading. At present, although the central bank has given multiple market signals about this move, its actions remain relatively cautious. As researchers at ANBOUND had previously noted, the PBoC's involvement in the secondary market for government bonds could carry significant policy implications for the market, with a potentially large impact on the bond market itself. After Pan’s announcement of the resumption of bond trading, bond yields across various maturities dropped by about 3 basis points on the evening of October 27. Perhaps this factor has contributed to the central bank’s particularly cautious approach to entering the market this time.
Researchers at ANBOUND believe there are two main reasons behind the central bank's buying and selling of government bonds. On one hand, with the growing influence of the bond market, the PBoC aims to achieve more precise adjustments to market interest rates, thereby improving the efficiency of interest rate transmission. On the other hand, the goal is to form a complete yield curve and enhance the flexibility of market interest rates. Other major central banks are also implementing similar yield curve control operations. At the same time, this move is intended to coordinate with the Ministry of Finance in government bond issuance, avoiding the impact of such issuances on market interest rates while providing an ideal market price for government bonds. There were speculations that the central bank's buying and selling of government bonds could signal a shift toward quantitative easing (QE) measures similar to those taken by the U.S., European, and Japanese central banks, but this was denied by the PBoC. The central bank views its bond trading as not just about buying, but also selling. Therefore, the focus of this process is more on the policy adjustments in the first two areas mentioned. Nevertheless, this does open up a channel for the central bank to directly manage liquidity. Whether it's QE or quantitative tightening (QT), these have now become theoretically viable options. However, as the central bank has emphasized, these unconventional policies are not meant to become a regular operational tool. The primary focus remains on coordinating with the fiscal authorities to achieve precise control over interest rates.
However, based on last year's experience, this process did not go as expected. At the time, with the market generally anticipating a rate cut by the central bank, the PBoC’s bond purchases further increased demand, which, in turn, pushed up market interest rates. This was contrary to the central bank’s initial intent. In 2024, the PBoC and the Ministry of Finance established a joint working group on government bond trading. From August to December, it carried out open market government bond operations, resulting in a net purchase of RMB 1 trillion, thereby injecting liquidity into the market. By the end of 2024, the PBoC's holdings of government bonds increased to RMB 2.88 trillion, accounting for 6.5% of its total assets. The yield on 10-year government bonds had risen to around 1.6%. After the PBoC announced the suspension of its government bond trading operations in January 2025, its holdings of government bonds gradually declined to RMB 2.4 trillion by May, with the proportion of total assets falling back to about 5.4%. Nevertheless, such a scale of government bond holdings still made the PBoC the largest "market maker" in the bond market, and its operational direction inevitably had a significant impact on the market. This was likely the primary reason behind the central bank's decision to pause its buying and selling operations.
The core issue lies in the fact that the central bank's buying and selling operations contradicted its policy interest rate adjustments, which significantly undermined the effectiveness of its government bond trading. When the PBoC first attempted to engage in the market, it did not hold the physical bonds, meaning its operations were essentially limited to the "buying" phase. The bank's strategy to "buy short and sell long" aimed to steepen the yield curve. However, in practice, it could only "buy short", while its "selling long" operations relied on borrowing bonds, akin to "short selling". This approach, in turn, heightened market speculation risks. Consequently, despite generating short-term market volatility over several months, the central bank's actions struggled to create a lasting impact on market trends. As pointed out by researchers at the ANBOUND, buying and selling government bonds is a much more complex task than it might seem at first glance.
The PBoC's consideration to re-enter the market and resume government bond trading is also based on the fact that market expectations are currently more stable, with no longer the same interest rate cut expectations as at the beginning of the year. On one hand, the central bank's rate cut in May this year has already released the momentum for market interest rates, improving the situation of a one-way market. On the other hand, with the stock market warming up, the "stock-bond seesaw" effect has caused a cooling in the bond market, bringing market interest rates back to "normal levels". According to data from iFind by Tonghuashun, in January this year, the yield on 10-year government bonds briefly fell below 1.6%, with the spread between the policy rate and the bond yield being less than 10 basis points. Currently, the 10-year bond yield is around 1.8%, with the spread between the policy rate and the bond yield at about 40 basis points. This gives the central bank more room to maneuver in its buying and selling operations. In this context, the PBoC can fine-tune the interest rate term structure by purchasing a variety of short- and long-term government bonds, thus helping to stabilize the bond market to some extent. This may be what Pan was referring to when he said the current market environment offers a favorable condition for the central bank to enter the market.
Given the deepening of China's "bond economy", with the current scale of Chinese government bonds exceeding RMB 30 trillion, the increasing financialization of fiscal policy means a growing need for cooperation between the central bank and the Ministry of Finance. This is likely one of the main reasons why the central bank wants to buy and sell government bonds in the secondary market, i.e., to work with the Ministry of Finance to control the yield curve. As the bond market declines, financing costs also rise, increasing the costs of issuing government bonds. Therefore, purchasing either short-term or long-term bonds will correspondingly lower market interest rates, which is beneficial for government bond issuance. The central bank can take advantage of this opportunity to buy government bonds, both to inject liquidity into the market precisely and to accumulate leverage for future reverse operations, thus gaining the initiative.
This is indeed a challenging task. The major issue in the central bank's buying and selling of government bonds lies in aligning market interest rates with its intentions while also respecting market pricing. This balance must be maintained to control the yield curve without causing additional volatility or rebound due to price distortions. If the PBoC’s operations deviate from market pricing, it could lead to policy risks and market shocks. According to ANBOUND’s founder Kung Chan, the monetary system is a large macro system, and emphasizing "precision" in such a system is practically impossible. He is concerned that this finely-tuned policy approach could become overly complicated. While the timing may be ripe for the central bank to resume buying and selling government bonds, it is still not a process that can be carried out without caution. A more careful and precise approach to managing market changes, therefore, is indispensable. Striking the balance between policy intervention and market regulation will be key to achieving the objectives of this policy tool.
Final analysis conclusion:
The PBoC has recently reiterated its plan to resume buying and selling government bonds. As the financialization of fiscal policy deepens, the central bank's bond operations serve not only as a means of precisely adjusting liquidity but also as a necessary tool for coordinating with fiscal policy to control the yield curve. In the short term, the current bond market environment is indeed favorable for the central bank to re-enter the market, but the impact and consequences of such actions require caution. The key to the successful implementation of this policy lies in balancing policy intervention with market regulation.
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Dr. Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.
