The onshore CGB curve bear witnessed bear flattening yesterday. 2Y yield hit three-week high of 1.28%, while 10Y yields hover around 1.74%. This could be a combined result of weak growth and slim chance of benchmark rate cuts (see: China: Growth moderates; fiscal support in the pipeline).
The market anticipates stimulus to rescue sluggish domestic demand. First, the deployment of fiscal stimulus is expected to accelerate in the second half of the year. Growth in outstanding government bonds has already fallen from its peak of 21.9% YoY in July 2025 to 14.2% in June 2026. Both local and central government bond issuances are onset to meet the annual quota. Also, investors should not rule out the possibility of additional bond issuance. The government could also ramp up more concrete measures to support consumption. Beijing has set a clear target in the 15th Five Year Plan, where retail sales value is expected to jump from RMB50trn in 2025 to RMB60trn in 2026, implying a CAGR of 3.71% over the next five years.
Second, the PBOC is gearing up liquidity injections to support the economy. The central bank hinted the use of monetary policy tools such as RRR cuts and short-end bond buying in 2H26 during yesterday's briefing. The RMB strength leaves room for potential easing. This could re-engineer steepening. Short-end rates should remain anchored, while long-end rates could rebound moderately on growth expectations.
That said, the overall upside of long-end is capped by the weak credit growth in the medium-term. Outstanding loan growth has reached a two-decade low of 5.2% YoY in June. New CNY loans have plunged by 16% YoY YTD. The rising corporate bond and equity financing from “New Quality Productive Forces”, which have jumped 82% and 72% respectively, could hardly offset the weak loan demand. New total social financing has fallen by 9%. Banks are also increasingly buying corporate bonds. Bond investment allows banks to lower credit, liquidity, and duration risks relative to bank loans.
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