MNI: PBOC To Increase CGB Purchases, Add Longer Tenors

The People’s Bank of China is likely to increase treasury bond purchases this year, though last month’s smaller-than-expected CNY20 billion restart signalled the Bank’s preference to avoid sharply pushing down yields, economists and traders told MNI, noting the focus will likely shift more toward medium- to long-term maturities compared with 2024.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance, said October’s modest purchase suggested the Bank wanted to avoid creating expectations of excessively loose policy while also preventing a sharp decline in yields. (See MNI: PBOC Seen Resuming Bond Purchases As Gov't Issuance Rises)

By resuming CGB trading, the PBOC is injecting long-term liquidity into the banking system and guiding lenders to expand credit, Dong noted, predicting further CGB purchases for the remainder of the year to smooth liquidity pressures and respond to market expectations of a reserve requirement ratio (RRR) cut. He anticipates an RRR reduction next month following the Central Economic Work Conference but believes near-term Loan Prime Rate (LPR) easing remains unlikely given narrowing bank interest margins.

Analysts at China Merchants Securities project net purchases of around CNY500 billion this year, noting the Bank would need to buy more than CNY700 billion to generate a net base money injection – down from the CNY1 trillion acquired between August and December 2024. Economists agree the PBOC has room for further buying, with PBOC holdings accounting for about 4.7% of total assets, relatively low compared with Japan, the EU, and the U.S.

Wen Bin, chief economist at China Minsheng Bank, said the 10-year treasury yield could briefly reach 1.7% if purchases increase from its current 1.8% level, but over the medium to long term, it is likely to fluctuate between 1.7% and 1.9%, reflecting a mix of PBOC purchases, the need for low interest rates, and improved China-U.S. negotiations.

TENORS

Wen suggested the central bank would increase medium- to long-term purchases while still buying short-term bonds, steepening the short- to medium-term curve.

A bond trader told MNI that, because the PBOC’s bond-purchase counterparties are major banks, and judging from their recent activity, the new round of operations may include more medium- to long-term CGBs, in contrast to last year’s focus on two- to seven-year maturities. 

However, the PBOC is unlikely to buy at a rapid pace given already ample medium- to long-term liquidity and generally accommodative conditions, he said, meaning reliance on bond purchases remains limited.

Dong expects the Bank to continue its 2024 approach, buying short-term bonds while selling long-term paper to inject base money and maintain a reasonable yield curve. 

EXTRA LIQUIDITY 

Wen said rising CGB yields, robust commodity and equity markets, large government bond issuance, and credit demand have all contributed to the resumption of CGB trading. October-November government bond issuance is likely to reach the trillion-yuan scale, while local government debt quotas for 2026 will be front-loaded, he predicts, requiring liquidity support from the PBOC. 

Authorities are also accelerating the launch of a CNY500 billion policy-based financial tool, potentially leveraging CNY5 trillion in investment and CNY2-2.5 trillion in loan demand, he added. The yuan exchange rate is also a key consideration, with the U.S. Federal Reserve’s likely two rate cuts over the next 12 months expected to help stabilise the currency against the dollar, Wen said. (See MNI: China Promotes FX Hedging As Yuan Swings Seen Growing)

According to the PBOC’s balance sheet, about 76% of purchased CGBs had matured by September 2025. The Bank has also used outright reverse repos and Medium-term Lending Facilities to inject liquidity, but combined maturities of these tools in Q4 2025 and January 2026 will total CNY5.6 trillion and CNY1.9 trillion respectively, requiring additional bond purchases, Wen concluded.