China's banks are leaning harder into sovereign paper. According to the central bank, claims on the government amounted to 16.4% of assets as of July, versus 11.5% five years earlier. At the same time, claims on residents slipped to 16.4% from 20.3%, marking the first time the two lines have crossed.
Even with that shift, corporate exposure still carries the most weight for bank revenue. Revenue linked to claims on non‑financial companies rose to 42% in July, compared with 39% five years ago. Pricing keeps sliding too: interest rates on new corporate loans were lower by 0.2 percentage point from a year earlier to just under 3% in July, with bankers saying strong state-owned borrowers can sometimes lock in around 2.5%.
For households, the average mortgage rate in July was 3.1%. Meanwhile, a Bloomberg Total Return Index shows Chinese government bonds delivered a 2.4% buy-and-hold gain over the past year, below the 4.8% average annual return from 2021 to 2025.
With mortgages and consumer lending in a funk, banks have fewer places to put money to work, and government debt has become the default parking spot. The tilt reflects how hard it has been to spark new borrowing after an unprecedented property crisis and a prolonged slump in consumption. People familiar with the industry say some smaller lenders saw lending activity tumble more than 40% year over year in the first half. Tighter rules aimed at reining in riskier consumer and online loans have also squeezed traditional income sources, those bankers added.
In that environment, bankers say bonds have shifted from being mainly a liquidity backstop to being a go-to asset to fill balance sheets and support earnings. The big state banks are in the mix too: bond investment accounted for over 90% of first-half interest income growth at Agricultural Bank of China Ltd., the country's second-largest lender by assets. Analysts anticipate that Industrial & Commercial Bank of China and Agricultural Bank of China will steer money from Beijing's fresh recapitalization plan of 300 billion yuan ($44.7 billion) toward buying more 30‑year government bonds.
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Strategists see the trend continuing. Jason Lui, head of Markets 360, Asia Pacific at BNP Paribas, expects banks' exposure to sovereign debt to climb steadily. "With companies increasingly turning to equity and bond issuance for fundraising and onshore investable assets remaining limited after the property crisis, banks are likely to favor government securities as safe, liquid alternatives to match their balance‑sheet deposits," he said. At BofA Global Research, Winnie Wu, who leads Asia Pacific equity strategy and co-heads China equity research, says banks' claims on the government could edge up toward nearly 20% of total assets over the next five years.
There is a catch: China's yields are among the lowest anywhere. The 10-year sits around 1.68%, hovering about 10 basis points higher than its all-time trough. With little urgency from policymakers to go big on monetary easing, there may not be much room for yields to fall further. ING Bank NV's Lynn Song, the chief economist for Greater China, said, "I don't think China bonds as a profit source is a sustainable answer at this point in the markets."
Heavier bond holdings also complicate risk management. Authorities have cautioned repeatedly about an overextended rally, pointing to the danger of a sudden reversal and a disconnect between bond prices and the economy. While banks' sovereign purchases help finance fiscal support, they can also run counter to efforts to channel more credit to private firms and consumers. If government bond positions keep growing while loan appetite stays weak, "banks may become increasingly efficient at funding public-sector borrowing while contributing less directly to the revival of private-sector credit," said Liao Zhiming, an analyst at Huayuan Securities. "The bigger test will come if the bond rally fades before loan demand recovers, forcing banks to confront both weaker investment returns and a still-fragile lending environment."
For now, China's banks are acting more like bond funds than lenders, with returns tied closely to low yields and price stability. If yields back up or the rally cools before credit demand rebounds, bank profits could feel it, and the spillover into the real economy could stay muted. If yields stay pinned, earnings may remain steady but capped. Either way, watch the balance between bond gains and new lending: it is the tell for how much support China's banking system can deliver to growth, and how smooth or bumpy the ride could be for anyone exposed to China-sensitive assets.
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