FINANCE

Analysis: How a Scrapped Tax Exemption Will Change China’s Bond Market

By Qing Na, Wang Shiyu, Quan Yue and Wu Xiaomeng

Published: Sep. 12, 2025 7:25 p.m. GMT+8

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Institutional investors now have to pay VAT on the interest they earn on newly issued Chinese sovereign, local government and financial bonds. Photo: AI generated

A tax change for institutional investors in certain Chinese bonds will spur trading, reduce price distortions and discourage them from parking too much capital in the multitrillion-dollar market, analysts said.

Under the change, announced last month, institutional investors now have to pay value-added tax (VAT) on the interest they earn on newly issued Chinese sovereign, local government and financial bonds. Financial bonds are issued by policy banks, commercial lenders and other financial institutions in China.

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What Happened When

By the end of 2024：: Commercial banks accounted for more than 55% of interbank bond holdings.

Before August 2025：: One senior banker reported that his bank had already completed most planned investments for the year before the tax change took effect.

End of June 2025：: Total value of all outstanding Chinese sovereign, local government and financial bonds reached 131.6 trillion yuan.

August 3, 2025：: Kaiyuan Securities Co. Ltd. analysts published a report analyzing the effects of the VAT exemption on bond yields.

August 5, 2025：: China Chengxin International Credit Rating Co. Ltd. published a report on the impact of the VAT exemption on government bond yields as a market benchmark.

August 5, 2025：: China Minsheng Banking Corp. Ltd. analysts published a report estimating that the new policy will potentially give corporate and non-sovereign bonds a boost.

August 2025：: The Chinese government announced a tax change requiring institutional investors to pay VAT on interest earned from newly issued sovereign, local government, and financial bonds.

August 8, 2025：: Tax change requiring institutional investors to pay VAT on interest from newly issued sovereign, local government, and financial bonds went into effect. Bonds issued before this date are not subject to the new tax.

AI generated, for reference only