Credit-bond ETFs shrank by Rmb11.6bn on 30 October alone. Fund managers sold their most liquid holdings, including bank capital bonds and 30-year government debt. Brokers disagree on whether the worst of the redemptions has passed, and Huafa pays bond interest again on Wednesday.
MoneyTurkey Bonds Desk | 3 November 2026
Key points
- Exchange-traded funds (ETFs) holding credit bonds lost Rmb11.6bn on 30 October, about 80% of what they had taken in over the previous four days. Their weekly total still rose by Rmb2.9bn to a record Rmb786.8bn, according to Industrial Securities.
- Fund managers sold liquid assets first. That meant bank perpetual and tier-2 bonds, then weaker local-government financing vehicle (LGFV) debt. Thirty-year government bond futures had their biggest one-day fall since March.
- Zhongyou Securities says the redemptions are not over. In its count, sell-offs driven by investor withdrawals have taken more than three months to recover. Sell-offs driven by funding costs have usually recovered within a month.
- The People’s Bank of China (PBOC) created a backstop for bond funds facing redemptions on 26 October. It is designed to rescue markets, not individual institutions, and comes with conditions.
- Huafa has kept paying its public bonds. The next checks are an interest payment on 4 November and the loan prime rate (LPR) fixing on 20 November.
What happened
The pressure that started at Zhuhai Huafa Group has moved down a clear chain. Investors pulled money from credit funds, and those funds then had to sell bonds.
Huafa is a conglomerate owned by local governments in Guangdong. Zhuhai’s state-asset regulator holds about 93.5% and the provincial finance department holds the rest. In late October, people familiar with the matter told Bloomberg that the group had missed payments on two trust products. It had also asked at least three banks to extend loans and lower interest rates. Bloomberg later reported that Huafa had repaid some investors in one of those trust products on 29 October. The group has not confirmed or denied either report, according to Investment Times.
Huafa has not missed a payment on any public bond. It said it would pay interest on its Rmb1bn “19 Huafa” bond on 4 November and has announced payment on its “25 Zhuhua Y3” perpetual note. On 19 October it sold Rmb1bn of short-term notes at 2.07%. Bids covered only Rmb620m, and the lead underwriters, Bank of Shanghai and SPD Bank, took up the rest.
The balance sheet explains why the market is worried. At the end of September, Huafa had Rmb154bn of debt due within a year and Rmb52.2bn of cash, according to its third-quarter report as analysed by Investment Times. That gives a cash-to-short-term-debt ratio of 0.34. The group lost Rmb6.9bn in the first nine months of the year, and its listed property arm, Huafa Properties, lost Rmb6.4bn. Fitch put the group’s BBB rating on watch negative on 29 October. Huafa’s offshore yuan bonds fell as low as about 54% of face value.
The selling peaked on Friday 30 October. Wind data cited by Cailian Press show that credit-bond yields rose by 4–10 basis points that day. Credit-bond ETFs shrank by Rmb11.6bn. Liang Weichao, an analyst at Zhongyou Securities, said falls in fund values quickly turned into redemptions. Bank perpetual and tier-2 bonds fell the most because they are liquid and widely held. Thirty-year cash bonds and their futures fell together. Liang also noted that interbank funding conditions were not tight: the fall came from how the market was positioned, not from a cash shortage.
Markets recovered on Monday and Tuesday. On 3 November the yield on the benchmark 30-year special government bond fell 1.8 basis points to 2.052%, and the 10-year fell to 1.61%, according to Xinhua Finance.
Why it matters
This is the first live stress test for the Bond-market Non-bank Large-redemption Swap Facility (BNSF), which the PBOC announced on 26 October. Under the scheme, systemically important wealth-management subsidiaries of banks and mutual-fund managers can borrow central-bank bills from the PBOC. They raise cash against those bills in the repo market and use it to buy assets from their own products that are facing redemptions. The design gets around the rule that the central bank cannot lend directly to non-banks. Xinhua Finance reported that the facility is meant for “extreme” market-wide stress only, and that institutions that took excessive risks will be excluded. In other words, it rescues markets, not institutions. No source we checked says the facility has been used yet.
The PBOC also changed how it signals interest rates. From 2 November its main policy rate is the overnight reverse repo rate, set at 1.25%. Zhongyou says this narrows the corridor for funding rates to 1.00–1.50%. In Zhongyou’s view, the market had already treated the change as a rate cut, so the good news has now been priced in.
The new element is how Huafa has been sold. A company owned by a local government, exposed to property and treated by investors like an LGFV, was assumed to carry implicit state support. Caitong Securities’ chief fixed-income analyst, Sui Xiuping, said that because Huafa combines all three features, other regional state companies, weak LGFVs and developers were all repriced together. Liang adds a structural point: with China’s local-debt clean-up programme nearly finished, LGFVs are being valued on their own credit, not on the expectation of policy support. Credit spreads are near historic lows, so prices have little room to absorb that repricing.
Analysts disagree on how serious this is. Wang Haibo at CICC describes the outflows as precautionary: wealth-management products sold their fund holdings, but underlying clients did not rush to withdraw. He says wealth-management assets fell by only about Rmb100bn last week. CITIC Securities expects a faster recovery than after the redemption wave of late 2022. Zhongyou is more cautious. It counts 12 large sell-offs since the 2020 Yongmei default. By its figures, it took 123 trading days to recover from the November 2022 wealth-management run, and the August 2025 episode is still unresolved after 221 trading days.
What to watch
- 4 November: interest is due on “19 Huafa”. Each public bond payment made on time supports the view that this is a liquidity problem, not a solvency problem. China Zheshang Bank has said that extending or restructuring bonds could prompt a wider reassessment of state-owned companies.
- Talks with banks: reports say CICC is advising Huafa on extending its loans. The group has also sold Rmb4.57bn of stakes to Gree Electric and Zhuhai’s transport group.
- Credit-bond ETF flows: Sui expects volatility to last about two weeks and gaps to widen between ratings and between regions. Wang expects high-grade, short-dated bonds to stabilise first.
- The BNSF: any confirmation that it has been used would show the stress has reached the “extreme” threshold.
- 20 November LPR: the one-year rate is 3.00% and the five-year is 3.50%. Zhongyou says that if the rates stay the same, banks’ margin over the new policy rate simply widens by 15 basis points. A cut with an unchanged margin would be a real easing signal.
- Yield range: Huatai Fixed Income sees the 10-year government bond yield between 1.50% and 1.75%.
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Sources
- Zhongyou Securities via Sina Finance: https://k.sina.cn/article_5953466437_162dab0450670bgq5e.html
- Cailian Press via Sina Finance (ETF flows): https://finance.sina.com.cn/roll/2026-11-03/doc-inixncmu6633217.shtml
- Xinhua Finance bond daily, 3 Nov 2026: https://www.cnfin.com/yw-lb/detail/20261103/4490334_1.html
- Xinhua Finance on BNSF, 26 Oct 2026: https://www.cnfin.com/yw-lb/detail/20261026/4486555_1.html
- Investment Times via 10jqka (Huafa liquidity): https://stock.10jqka.com.cn/20261103/c681411608.shtml
- Bloomberg, Huafa trust repay 29 Oct: https://www.bloomberg.com/news/articles/2026-10-29/chinese-conglomerate-zhuhai-huafa-repays-overdue-trust-product
- The Edge / Bloomberg, Huafa debt strain 3 Nov: https://theedgemalaysia.com/node/824335
For information only. Not investment advice.
