China’s move toward a more relaxed monetary policy in 2025 is stirring optimism in financial markets, with analysts forecasting further declines in sovereign bond yields that are already at record lows. The prospect of a sustained easing cycle is reshaping expectations, presenting opportunities for both bond and equity markets as Beijing seeks to counterbalance domestic and global economic challenges.
Key financial institutions, including Tianfeng Securities, Zheshang Securities, and Standard Chartered Bank, predict that China’s 10-year sovereign bond yields could drop to as low as 1.5%-1.6% by the end of 2025. These yields fell by five basis points to 1.86% in early trading on Tuesday, continuing a decline that began on Monday following a critical meeting of the Communist Party’s Politburo. The benchmark CSI 300 Index also surged as much as 3.3% in early trading Tuesday, reflecting investor confidence in the announced policy directions.
The market sentiment aligns with China’s announcement of “moderately loose” monetary policy and “more proactive” fiscal policy in 2025, signaling the most direct commitment to stimulus measures in recent years. The focus on accommodative measures is seen as a response to both domestic economic weaknesses and the potential geopolitical headwinds from a renewed trade war, especially with the possibility of Donald Trump returning to the White House.
The Politburo’s declaration marks a pivotal shift in China’s macroeconomic strategy. This transition comes as policymakers face the dual challenges of sluggish growth and mounting fiscal pressures. Analysts at Zheshang Securities described the Politburo’s meeting as a “milestone point of policy shift,” projecting simultaneous gains in both equity and bond markets under the new stance.
The adjustment in sovereign bond yields is striking. Over recent weeks, 30-year Chinese yields fell below their Japanese equivalents for the first time in two decades, and 10-year yields broke through the key psychological level of 2% earlier in December. These developments underscore a transformation in investor expectations, fueled by persistent economic data weakness and robust liquidity injections by the central bank.
China’s bond market experienced a mixed response to previous stimulus measures, such as the late-September fiscal push, when fears of capital shifting from fixed income to equities led to a brief rise in yields. However, the market has since rebounded, with traders rebuilding long positions in bonds. Analysts attribute this trend to sustained soft economic data and the central bank’s efforts to absorb the increased supply of government debt.
“The Politburo’s reaffirmation of a moderately loose monetary policy stance suggests a favorable environment for both equities and fixed-income assets,” analysts at Zheshang Securities stated. They predict that 10-year yields could test the 1.6% threshold as the policy framework stabilizes.
Wall Street banks are also adjusting their strategies. Citigroup has recommended long positions in 30-year Chinese government bonds, paired with hedges against currency risks. Goldman Sachs, meanwhile, has expressed a preference for five-year bonds using a similar approach, citing attractive relative value in the current environment.
Chinese government bonds have emerged as a top choice for investors seeking risk-free yield. “The low yields represent the government with a rare window of low-cost financing at a time when fiscal stimulus support and refinancing of debt are both useful,” wrote Lynn Song, Chief China Economist at ING Bank NV.
Foreign investors, too, are taking note of China’s evolving bond market dynamics. The combination of competitive yields and a stable policy backdrop makes Chinese sovereign bonds a compelling alternative to other low-yielding developed markets. With the yield differential between China and Japan narrowing sharply, some analysts see the potential for Chinese bonds to attract a greater share of global capital flows.
China’s move toward a looser monetary policy is set against the backdrop of broader economic and geopolitical uncertainties. Domestically, the country has faced slowing growth, a fragile property market, and deflationary pressures. Globally, the specter of a renewed trade war and tightening financial conditions in advanced economies pose significant risks.
The central bank has already cut interest rates multiple times in 2023 and 2024 to spur lending and support growth. Further rate cuts are anticipated in 2025, with Goldman Sachs and Morgan Stanley projecting a cumulative reduction of 40 basis points next year. These measures are expected to complement fiscal policies aimed at driving infrastructure investment and stabilizing consumer confidence.
China’s focus on fiscal stimulus is notable, as it seeks to balance near-term growth objectives with long-term debt sustainability. By lowering borrowing costs, the government creates room to refinance existing obligations while funding new initiatives aimed at boosting economic activity.
“The decline in bond yields provides a favorable environment for fiscal policy to operate more effectively,” noted analysts. They emphasized that the central bank’s liquidity injections are crucial to ensuring the smooth absorption of increased government debt issuance.
The policy shift is not just bullish for bonds; equities are also poised to benefit from the supportive macroeconomic environment. The CSI 300 Index’s sharp gains on Tuesday underscore growing optimism among equity investors, who see the policy shift as a catalyst for renewed growth in corporate earnings and market valuations.
Chinese equities have faced significant headwinds over the past two years, with concerns over regulatory crackdowns and weak consumer demand weighing on sentiment. However, the latest signals from policymakers suggest a renewed commitment to stabilizing and supporting the stock market.
China’s pivot toward looser monetary policy carries implications for global markets. As the world’s second-largest economy, its financial and economic policies influence global capital flows and investor sentiment. The potential for sustained low yields in China’s sovereign bonds could encourage international investors to allocate more capital to the region, enhancing liquidity and market depth.
At the same time, China’s policies may serve as a counterweight to the tightening monetary stances in other major economies, particularly the United States and the Eurozone. By maintaining an accommodative policy stance, China positions itself as an outlier in a global environment marked by rising interest rates and restrictive financial conditions.
Despite the optimism, there are risks to China’s policy trajectory. Persistent structural challenges, such as high levels of local government debt and a fragile real estate sector, could limit the effectiveness of monetary and fiscal measures. Moreover, external risks, including geopolitical tensions and volatile commodity prices, add layers of complexity to the economic outlook.
Additionally, the prospect of further currency depreciation could erode the attractiveness of Chinese bonds for foreign investors, despite hedging strategies. The renminbi’s performance will be a key variable to watch in the coming months as global investors weigh the trade-offs between yield and currency risk.
