Tax Policy Changes - The Ministry of Finance and the State Taxation Administration announced that from August 8, 2025, interest income from newly issued government bonds, local government bonds, and financial bonds will be subject to VAT[3] - Interest income from bonds issued before this date will continue to be exempt from VAT until maturity[3] Estimated Tax Revenue - The estimated VAT revenue from interest income for the year is approximately 14.4 billion RMB[6] - Assuming 15 trillion RMB in new bond issuance from August to December 2025 at an average coupon rate of 1.75%, the taxable interest amount is estimated to be around 262.5 billion RMB, leading to a VAT revenue of about 14.4 billion RMB[6] Impact on Bond Yields - The introduction of VAT on new bonds is expected to push up the issuance yields, with a potential increase of 6-10 basis points for new 10-year bonds[13] - The tax burden will be shared between investors and issuers, limiting the actual increase in yields[13] Market Dynamics - Following the announcement, the yield on 10-year government bonds initially rose but then fell by 1 basis point, indicating strong buying interest in existing bonds[14] - The tax changes may narrow the yield gap between government bonds and credit bonds, potentially shifting some investment towards the credit bond market[14] Fiscal Policy Objectives - The tax reform aims to enhance fiscal revenue capacity and alleviate fiscal pressure, as the government debt-to-GDP ratio has risen significantly from 37.9% in 2019 to 65.3% in Q2 2023[18] - The reform is part of a broader effort to streamline the tax system and remove outdated tax exemptions, promoting a more modern tax structure[18]