Core Viewpoint - The Ministry of Finance and the State Taxation Administration announced that starting from August 8, 2025, interest income from newly issued government bonds, local government bonds, and financial bonds will be subject to value-added tax (VAT), while existing bonds will remain exempt until maturity. This policy aims to enhance the trading activity of government bonds and improve the benchmark role of the government bond yield curve [3][4][5]. Summary by Sections - **Policy Announcement**: The new VAT policy will apply only to bonds issued on or after August 8, 2025, while previously issued bonds will continue to enjoy tax exemption until maturity. This "new and old distinction" principle limits the overall market impact [3][4]. - **Market Context**: In 2024, the total stock of government and financial bonds was 122 trillion yuan, with new issuances amounting to 33 trillion yuan, indicating that new issuances represent less than 30% of the total stock [4]. - **Market Impact**: The VAT rate is set at 6%, and the policy change primarily affects domestic investors, excluding interbank certificates of deposit. Experts believe the overall market pressure will be manageable and the impact controllable [5]. - **Liquidity and Trading Activity**: The adjustment is expected to enhance the liquidity of government bonds, which had previously been low due to the tax exemption encouraging a buy-and-hold strategy. The new policy aims to reduce the liquidity premium and improve trading activity among different types of bonds and financial assets [5]. - **Benchmark Role of Government Bonds**: The unification of tax standards across different bond types is anticipated to strengthen the pricing benchmark function of the government bond yield curve, making it more comparable with other financial assets [5].