The Chinese government bond market prices are strengthening, and liquidity strength has been confirmed.

Despite the government’s plan to issue government bonds on a large scale, China’s government bond market continues to see prices rise, supported by abundant market liquidity.

Bloomberg reported on the 21st (local time) that China’s 10-year government bond yield once fell below 1.75% during intraday trading that day. This marks a drop of about 7 basis points (bp, 1bp=0.01%) within the month. In the bond market, lower interest rates mean increased demand for bonds, which in turn pushes prices higher. Especially considering that the Chinese government plans to start issuing 30-year ultra-long-term special government bonds on the 25th, this rally can be viewed as a rare bull market where prices remain firm despite supply expanding.

Typically, when government bond issuance increases, the market needs to absorb the newly issued bonds, so existing bond prices are prone to weaken and interest rates tend to rise. However, some commentary suggests that, in China’s current market, liquidity effects are playing an even stronger role than this general formula. The context is the loose monetary policy implemented by China’s central bank—the People’s Bank of China. In order to boost the economy and supply ample funds to the market, the overnight repurchase agreement (the so-called repo rate), which is used as a benchmark when financial institutions borrow short-term funds, has been kept at its lowest level since 2023. The previous day’s single-day overnight repo transaction volume reached 8.5 trillion yuan (about 1834 trillion Korean won), setting a historical high, which also shows just how plentiful market funds are.

Meanwhile, China’s government bonds have recently been mentioned as an alternative safe asset among overseas investors. Some views hold that, following the war in the Middle East, the likelihood of fluctuations in international energy prices has increased, and that China is considered to face relatively fewer direct shocks than other regions, highlighting the appeal of investing in its bonds. With concerns about economic slowdown still lingering, if expectations of falling interest rates are added, the likelihood of funds flowing into government bonds rather than assets with high price volatility increases.

There are also market forecasts suggesting that if the People’s Bank of China takes further easing measures, interest rates could fall even further. China Zhongtai Securities, in a recent report, forecast that China’s 10-year government bond yield could fall to around 1.6% this year. This would be its lowest level since February 2025. Ultimately, in the short term, China’s government bond market may be more influenced by abundant liquidity and the psychology of preference for safe assets than by the government’s expanded issuance. Whether this trend can continue in the future will depend on the strength of China’s economic stimulus, global geopolitical variables, and whether the People’s Bank of China will implement further monetary easing.