Core Viewpoint - The recent announcement by the Ministry of Finance and the State Taxation Administration indicates that from August 8, new government bonds, local government bonds, and financial bonds will be subject to value-added tax on interest income, marking a significant policy shift in the bond market [1][2]. Background and Reasons - The restoration of value-added tax on new government bonds is a result of multiple factors, including the historical context of tax exemptions aimed at attracting investors to the bond market during its early development [2][3]. - Prior to the comprehensive implementation of the "business tax to value-added tax" reform in 2016, interest income from government bonds was exempt from business tax, and this exemption was extended to local and financial bonds [2]. - As of June 2025, the total bond stock in China is projected to reach 188.11 trillion yuan, reflecting a 14.95% increase from the end of 2024, indicating the growing recognition of bond investment value [2]. Fiscal Impact - The new tax policy is expected to increase fiscal revenue and alleviate financial pressure, particularly for social security expenditures such as childcare subsidies. The Ministry of Finance reported a 1.2% year-on-year decline in national tax revenue for the first half of the year, amounting to 9.29 trillion yuan [3]. Differentiated Impact on Bond Market - The new tax policy will have varying impacts on different types of bonds and investors, categorized into three key areas: 1. **New vs. Old Bonds**: The policy distinguishes between new and existing bonds, maintaining tax exemptions for bonds issued before August 8, which may lead to increased demand and lower yields for older bonds [4]. 2. **Investor Types**: Different investors will face varying tax burdens; public funds and asset management products will benefit from a reduced tax rate of 3%, compared to 6% for banks and insurance companies [5]. 3. **Protection for Ordinary Investors**: The policy includes provisions for ordinary investors, allowing tax exemptions on interest income up to 100,000 yuan per month until December 31, 2027, reflecting a consideration for retail investor needs [6]. Investment Opportunities - To mitigate the impact of the new tax policy, investors are encouraged to focus on products like government bond ETFs, particularly those with a high proportion of older bonds, which will continue to enjoy tax exemptions [7]. - The Ten-Year Government Bond ETF and the Five-Year Government Bond ETF are highlighted as unique offerings in their respective categories, with over 80% of their holdings being older bonds exempt from the new tax [7][8]. - These ETFs also provide advantages such as T+0 trading, pledging, and futures arbitrage, making them attractive to both individual and institutional investors [8].