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

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Guolian Minsheng Securities released a research report on February 11, 2026, with analysts Wang Xianshuang and Wen Xueyang interpreting the central bank's latest "Fourth Quarter 2025 China Monetary Policy Implementation Report". The report focuses on the normalization shift in the central bank’s government bond trading operations, a policy signal of key importance for understanding the evolution of China’s monetary policy framework and the trajectory of the bond market.

The Triple Logic Behind Normalization

The "Report" clearly states: "In the future, the People's Bank of China will carry out government bond trading operations in a normalized manner, monitor changes in long-term yields, and flexibly control the scale of operations." This marks a major adjustment to the central bank's monetary injection channels.

Guolian Minsheng interprets this shift from three perspectives: From a long-term perspective, the annual average injection of base money needs to be 3.2 trillion yuan, but the statutory reserves are already at a low level and growth in foreign exchange reserves is limited, so the central bank needs to find new injection channels; From a cross-country comparison, the proportion of government bonds held by the central banks of the US and Japan in their base money are 79% and 92% respectively, while China is only 5.5%, indicating significant room for increases; From a short-term perspective, the central bank has cumulatively net purchased about 700 billion yuan in government bonds, and with an average 1-year maturity, 50-60 billion yuan comes due monthly, requiring continuous rolling operations.

Signs of Easing Margin Pressure

It is worth noting that the downward trend in loan interest rates in Q4 2025 has clearly slowed. The weighted average rate for new loans decreased by only 10 basis points quarter-on-quarter, the smallest drop since 2021, much lower than the 31bp and 39bp declines in Q4 2023 and Q4 2024. Guolian Minsheng believes that the downward pressure on new industry loan rates is gradually easing. It is possible to see stabilization or even a rebound in Q1 2026. With high-yield deposits maturing, margin pressure on banks is expected to ease.

The report shows that the excess reserve ratio at the end of 2025 rose to 1.5%, a year-on-year increase of 0.4 percentage points, which explains the relatively loose funding at the start of the year. Looking ahead, given the high activity in the capital market, Guolian Minsheng expects the probability of a reserve requirement or interest rate cut in the first quarter is low. In the medium term, the "asset shortage" phenomenon may return and long-term bond yields have room to fall. For stock market liquidity, a neutral-to-cautious outlook is maintained until M1 growth stabilizes. There may be opportunities for excess returns in the bank sector.

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