(Yicai) April 19 — Commercial banks in China, especially small rural lenders and large state-owned enterprises, are investing heavily in the bond market as loan demand weakens.
Since the beginning of the year, rural commercial banks, which mainly cater to farmers and rural residents, have been the most active group of institutional investors. They bought CNY132.6 billion (USD18.3 billion) worth of bonds in the first two weeks of this month, mainly short-term bonds with maturities of 20 to 30 years, according to Minsheng Securities.
The trend started last year. Bond purchases by rural banks in the secondary market accounted for 12% of purchases in 2023, according to China’s foreign exchange trading system. Only brokerages, at 34 percent, and urban commercial banks, at 13 percent, bought more.
Banks have more cash to spend on bonds as demand for credit has fallen and depositors are more inclined to long-term deposits as interest rates are expected to fall further. Many banks have proposed putting more emphasis on bonds and less on credit at their annual earnings briefings.
Another group in the spotlight is large public lenders. Their net spending on bonds was the largest among banks last year due to their scale. For example, the Industrial and Commercial Bank of China increased its assets by CNY 1.3 trillion (USD 179.5 billion), or 13%, compared to 2022. The Agricultural Bank of China and the Construction Bank of China are two other other people who have joined the club of more than 1,000 billion CNY. last year, according to their financial reports.
Bond purchases can be considered liquidity management. A source in the investment department of a rural bank told Yicai that its headquarters had allocated relatively large amounts for bond investments this year due to difficulties in loan issuance.
“In the face of uncertainty and risks, it makes more sense to invest in bonds that carry less risk,” the source said, adding that they look for high-quality investment targets in this category every day .
But the risk increases with herd behavior. Whenever a sudden correction in the bond market causes the yield curve to invert, risks could quickly accumulate for bondholders, especially for banks with weaker liquidity and pricing power. weaker, according to a financial markets specialist at a state bank.
Editors: Tang Shihua, Emmi Laine