How to understand the normalization of central bank buying and selling government bonds?

China United Securities released a research report on February 11, 2026, with analysts Wang Xianshuang and Wen Xueyang interpreting the People’s Bank of China’s latest “Q4 2025 China Monetary Policy Implementation Report.” The report focuses on the normalization of the central bank’s government bond trading operations, a policy signal that is crucial for understanding the evolution of China’s monetary policy framework and the direction of the bond market.

The Threefold Logic Behind Normalization

The report explicitly states, “In the future, the People’s Bank of China will normalize government bond trading operations, monitor long-term yield changes, and flexibly adjust operation scales.” This marks a significant adjustment in the central bank’s monetary injection channels.

China United Securities interprets this shift from three perspectives: Long-term, the base money needs to be injected at an average annual rate of 3.2 trillion yuan, but statutory reserve ratios are already low, and foreign exchange reserves are growing slowly, so the PBOC needs to find new channels for liquidity injection; Horizontally, comparing with the US and Japan, where holdings of government bonds account for 79% and 92% of base money respectively, China’s share is only 5.5%, leaving significant room for increase; Short-term, the PBOC has already net purchased about 700 billion yuan of government bonds, with an average maturity of one year, and monthly maturities of 50-60 billion yuan, requiring ongoing rolling operations.

Signs of Easing in Interest Rate Spread Pressure

It is noteworthy that the downward momentum of loan interest rates in Q4 2025 has significantly slowed. The weighted average interest rate on new loans issued decreased by only 10 basis points month-on-month, the smallest decline since 2021, far below the 31bp and 39bp declines seen in Q4 2023 and Q4 2024. China United Securities believes that the downward pressure on new industry loan interest rates is gradually easing, and there is a possibility of stabilization or even rebound in Q1 2026. Coupled with maturing high-interest deposits, banks’ interest spread pressure is expected to ease.

The report shows that the excess reserve ratio rose to 1.5% by the end of 2025, up 0.4 percentage points year-on-year, explaining the relatively loose liquidity at the start of the year. Looking ahead, considering the high activity in capital markets, China United Securities expects a low probability of reserve requirement ratio cuts or interest rate cuts in Q1. In the medium term, the “asset shortage” phenomenon may return, and long-term bond yields could decline; regarding stock market liquidity, until M1 growth stabilizes, a neutral to conservative outlook is maintained, with attention to potential excess returns in the banking sector.

Risk Warnings and Disclaimer

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