Considering current domestic and external conditions, the necessity and feasibility of a short-term rate cut may increase. Weak real estate sales continue to drag down credit growth and inflation recovery. Recent rises in local government bond yields have intensified fiscal pressures, suggesting potential rate cuts to support struggling property markets, weak credit demand, and fiscal strains. Meanwhile, global easing trends and a temporary strengthening of the renminbi have narrowed the China-U.S. yield spread, while commercial banks' net interest margins show signs of recovery, leaving room for rate adjustments.
▍Weak Property Sector Drags Down Credit and Inflation Recovery Despite policy easing, property transactions show no marginal improvement, with persistently low homebuyer sentiment and sluggish inventory clearance. Weak sales and investment are dampening broader credit demand and limiting monetary multiplier growth, constraining inflation recovery. A short-term rate cut may be needed to bolster the sector and credit conditions.
▍Mounting Local Fiscal Pressures Call for Stronger Support With rising local government bond yields and front-loaded issuance expected in 2026, fiscal pressures could worsen. Narrowing spreads between high-yield urban investment bonds and low-yield government bonds, coupled with subdued debt resolution efficiency, may heighten the urgency for rate cuts.
▍Temporary Renminbi Strength and Global Easing Create Favorable Conditions Driven by a weaker U.S. dollar, improved cross-border capital flows, and optimistic policy expectations, the renminbi's recent appreciation offers a window for controlled, measured rate cuts. The Fed's renewed easing cycle has further relaxed external constraints on China's monetary policy.
▍Banks’ Liability Adjustments Ease Net Interest Margin Pressures Amid weak credit demand and low financing costs, banks face compressed asset yields while deposit competition keeps funding costs elevated. Recent moves by banks to scrap long-term fixed-deposit products and restructure liabilities could alleviate margin pressures, creating space for asset-side rate cuts.
▍Loose Monetary Cycle to Sustain; Early-Year Bond Opportunities Emerge Recent bond market corrections partly reflect banks’ shorter liability durations after deposit product adjustments. Over the medium term, central bank liquidity injections—potentially including bond purchases—may revive long-term bond demand. As year-end liquidity pressures fade and adjustments stabilize, early 2026 could see improved bond market risk-reward dynamics.
▍Risk Factors: Unexpected shifts in monetary policy or faster-than-expected financial data recovery.
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