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CGB yields have fallen across tenors since yesterday afternoon amid a targeted PBOC rate cut. Rather than lowering benchmark Loan Prime Rate (LPR), the central bank has cut interest rates on structural tools—such as rural, SME, tech, and green-related refinancing—by 25bps. As highlighted previously (see: CNY rates: Steepening bias remains), the PBOC is shifting toward an accommodative yet cautious monetary stance. The next LPR cut is expected to be delayed, to protect banks’ already stressed net interest margin (NIM). Beyond rate cuts, policymakers have withdrawn RMB 461bn through open market operations over the past two weeks, with R007 and DR007 repo rates rebounding to the 1.50–1.60% range.
Policymakers are preserving policy flexibility against potential external shocks to both growth and the currency. According to our estimates, the 25% Iran-related tariff (negative) and the removal of a 10% tariff from a previous trade deal (positive) are reducing China’s real GDP growth by around 0.26% point in 2026. Geopolitical risks aside, diverging monetary policies among major central banks could weigh on the RMB exchange rate. These include a potential delay in Fed rate cuts, an extended pause by the ECB, and upcoming rate hikes by the BOJ.
Stabilizing data prints are providing room for the central bank to turn slightly more neutral. While real GDP growth is projected to edge down from 4.8% YoY in 3Q25 to 4.6% in 4Q25, nominal GDP is likely catching up alongside a pickup in inflation. CPI has returned to positive territory for three consecutive months, reaching 0.8%—the highest level since February 2023. The contraction in PPI has also narrowed to 1.9%. This improvement is partly attributed to the anti-involution campaign, which aims to curb excessive investment and production. Monetary data released yesterday also mirrors the inflation acceleration. M2 growth has rebounded from 8.0% in November to 8.5%, while both short-term and medium- to long-term corporate borrowing accelerates.
Meanwhile, external trade remains a key growth engine. The trade surplus has reached USD 1 trillion for the second year despite ongoing trade tensions. Exports are growing by 6.6% YoY in December, supported by shipments to ASEAN and other emerging markets. Import growth has also accelerated, as manufacturers are stocking more intermediate goods in response to new orders. Taking these together, the upshot is that CGB yields should fall at a moderate pace in the near-term.
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