Group 1 - The report highlights the adjustment of the value-added tax policy on interest income from government bonds, which will be reinstated for new issues starting from August 8, 2025, while existing bonds will remain exempt until maturity [1][8][10] - The adjustment aims to enhance the pricing mechanism of the bond market and better establish the benchmark role of government bond rates, reflecting the government's commitment to tax reform and market development [1][10][12] - The current bond market size is reported at 189.76 trillion yuan, with government bonds accounting for 38.02 trillion yuan, local government bonds for 52.51 trillion yuan, and financial bonds for 42.34 trillion yuan [10][12] Group 2 - Public funds will maintain a tax advantage post-policy adjustment, which is expected to increase demand for self-operated and outsourced investments by banks, particularly in government and local bonds [2][12][14] - The effective tax rates post-adjustment are calculated at 3.26% for public funds and 6.34% for bank self-operated investments, necessitating a yield compensation of 4-8 basis points for public funds and 8-15 basis points for banks on newly issued bonds [2][14][24] - The report anticipates that the market will experience short-term fluctuations as investors adjust to the new tax implications, with potential downward pressure on existing bond yields and upward adjustments on new bond coupon rates [3][17][26] Group 3 - The adjustment is expected to influence the pricing of government bond futures, with new issues potentially requiring higher yields to become the cheapest-to-deliver (CTD) bonds [4][26] - The report indicates that the difficulty of new bonds becoming CTD will vary across different futures contracts, with certain contracts being more affected than others [4][26][27] - The analysis includes detailed calculations of the tax implications for various investor types, illustrating the differences in effective tax burdens before and after the policy change [21][22][24]

Investment Rating - The investment rating for the industry is "Positive" (maintained) [1] Core Insights - The new VAT regulations will impact the interest income from government bonds, local government bonds, and financial bonds, effective from August 8, 2025, leading to a potential decrease in banks' willingness to hold these bonds until maturity [3][13] - The adjustment in banks' bond allocation strategies is expected, with a shift towards more active trading and increased demand for external fund investments due to the new tax implications [4][22] - The overall performance of banks may be negatively affected by the new VAT rules, with estimated impacts on revenue and net profit for listed banks [5][6] Summary by Sections 1. Key Points of the New VAT Regulations - The new VAT regulations will restore the collection of VAT on interest income from newly issued government bonds, local government bonds, and financial bonds starting from August 8, 2025 [3][13] - Existing bonds and those under a renewal mechanism will continue to enjoy VAT exemptions until maturity [13][14] 2. Impact on Bond Allocation and Trading - Banks will need to adjust their hold-to-maturity strategies, with those capable of trading benefiting more from the new environment [4][22] - The scarcity of older bonds will lead banks to be more reluctant to sell, potentially slowing down the realization of investment gains [4][24] - There will be a phase of increased demand for external fund investments, particularly from banks with significant government bond maturities [4][22] 3. Performance Impact of the New VAT Regulations - The estimated VAT on newly allocated interest-bearing bonds could account for approximately 0.17% of revenue and 0.44% of net profit for listed banks, with state-owned banks being more significantly impacted [5][6] - The new VAT rules may weaken tax-exempt income and increase the cost of issuing bonds, necessitating close monitoring of potential adjustments to income tax rules related to bond investments [5][6] 4. Investment Recommendations - The report suggests a favorable outlook for dividend-paying stocks due to the reduced attractiveness of low-risk bonds [6] - Specific banks are recommended based on their risk profiles and potential for profit growth, including CITIC Bank, China Construction Bank, Agricultural Bank of China, and others [6]