“The importance of the financial markets department within commercial banks is still rising,” a deputy president of a rural commercial bank in the Yangtze River Delta region, who oversees the financial markets department, stated.
“This department used to be a ‘side dish’; now it has been promoted to the ‘main course’,” he remarked with a smile. Under his leadership, several traders each generate tens of millions in profits annually, making the financial markets department a genuine pillar of the bank's net profit. He also revealed that fund companies are willing to offer million-yuan annual salaries to poach bond traders from regional banks like theirs to work in Shanghai.
The deputy president's remarks are not unfounded. In recent years, the status of bond trading within banks has indeed advanced rapidly. According to the central bank's "2026 First Quarter Monetary Policy Execution Report," as of the end of 2025, the scale of bonds held by banks in China historically exceeded the 100 trillion yuan mark, accounting for 25% of total bank assets, an increase of 7 percentage points from 2015. Simultaneously, the ratio of bonds to loans rose to 35%, up 6 percentage points from 2015.
As bank bond holdings continue to climb, deeper signals have also emerged.
For the first time, the central bank explicitly stated in the aforementioned monetary policy report: "Bank bond investment and credit extension are both important ways to finance the real economy and are key channels for money creation."
In the view of Ming Ming, Chief Economist at CITIC Securities, this statement confirms that the new financing pattern of "credit + bonds" dual-drive has been firmly established.
He described the "mutual empowerment" dynamic between banks and the bond market: "Banks can strengthen market-making quotes, activate two-way transactions, and solidify price discovery. At the same time, they can play a counter-cyclical adjustment role to smooth market volatility and facilitate the transmission of policy rates to bonds and credit. Bond assets can stably contribute coupon income, smooth out credit cycle fluctuations, increase interest and fair value income, diversify asset risks, and become a low-volatility, long-term stable anchor for banks' revenue growth."
By the end of the first quarter of 2026, bond financing accounted for 29% of the outstanding social financing stock. In the eyes of industry insiders, this means the status of the "equal emphasis on bonds and loans" financing method has been further established.
However, from the perspective of institutional participants, the flip side of the coin also presents challenges: internal "old vs. new thinking" collisions within banks' bond investment businesses.
A fixed-income investment professional from the financial markets department of a rural commercial bank candidly stated that the traditional prudent culture and risk control mindset of the banking industry often seem constrained when facing the flexible and ever-changing capital market compared to bond market peers. "Using the traditional credit yardstick to measure investment business, while building a 'breakwater' of risk indicators, also simultaneously restricts the potential for improving bond allocation returns and increases the difficulty for banks to generate profits through bond investment."
On the other hand, undercurrents from non-bank financial institutions (NBFIs) cannot be ignored. The central bank sounded an alarm in the report: the pricing efficiency of the current bond market and the investment research and risk control capabilities of institutions still need refinement, specifically naming some NBFIs for high-risk operations such as "excessive leverage and maturity mismatch."
Standing at the new starting point where bank bond holdings have exceeded 100 trillion yuan, this change in the social financing structure is bringing new opportunities to the market while also testing the wisdom and resilience of every institutional participant involved. This profound transformation is reshaping banks' profit models and the underlying operational logic of the entire financial system.
The "Status" Leap of Bond Financing
The continuous rise in the proportion of bond financing over the past five-plus years has formed the basis for bank bond holdings surpassing 100 trillion yuan.
The latest central bank data shows that as of the end of March 2026, bond financing accounted for 29% of the outstanding social financing stock, an increase of 5 percentage points from early 2020, indicating significant growth. This also shows that China's social financing structure is undergoing positive adjustment, with the importance of direct financing channels continuously rising.
From the perspective of the stock structure, at the end of April 2026, the balance of RMB loans issued to the real economy accounted for 60.6% of the outstanding social financing stock in the same period, a year-on-year decrease of 1.3 percentage points; the balance of corporate bonds accounted for 7.8%, a year-on-year increase of 0.1 percentage points; the balance of government bonds accounted for 21.7%, a year-on-year increase of 1.4 percentage points. Bonds have become the firmly second-largest financing channel.
From an incremental perspective, in the first half of 2025, the proportion of net bond financing in the increment of social financing scale once reached as high as 38.6%, becoming an important force supporting social financing growth.
Within this framework, the bond proportion shows a distinct differentiation characterized by "strong rise in government bonds, relative stability in corporate bonds." As of the end of September 2025, the balance of government bonds accounted for 21.2% of the outstanding social financing stock, a year-on-year increase of 2.1 percentage points; the proportion of corporate bonds in the same period was 7.7%. Together, they pushed the proportion of direct financing, mainly bonds and stocks, to about 32%.
Looking back to June 2021, the proportion of government bonds was only 16.1%, and corporate bonds accounted for 9.5%. In just over four years, the proportion of government bonds jumped by more than 5 percentage points.
Analyzing this, Feng Lin, Executive Director of the Research and Development Department at Dongfang Jincheng, pointed out that for commercial banks, purchasing bonds can not only expand asset scale, but its behavioral logic is consistent with credit extension. It can create deposits on the liability side, achieving credit expansion and money creation, thereby broadening the channels for broad money creation. On the other hand, commercial banks themselves are also important issuers in the bond market, supplementing capital by issuing instruments such as Tier 2 capital bonds and perpetual bonds, thereby enhancing their credit extension capacity.
According to data, from 2020 to April 2026, the cumulative issuance scale of commercial bank subordinated bonds reached 9.16 trillion yuan, becoming an important way for banks to supplement capital. This two-way interaction of "issuance-investment" makes the relationship between banks and the bond market increasingly close. "Bonds are no longer just liquidity management tools but have become one of the core engines for bank asset expansion and profit growth."
"Bonds Compensating for Loans" in the Era of Low Interest Margins
In recent years, bank interest margins have continued to narrow, while the weight of bonds in bank asset allocation has been rising. Their contribution to the income statement has become increasingly prominent, even becoming a key engine for some banks to hedge against narrowing interest margins and achieve revenue growth.
Based on statements from various banks regarding bond investment income, their business perspectives on bond investment mainly focus on two logics: "bonds compensating for loans" and "trading for profits." In terms of actual financial performance, the net investment income of listed banks in 2025 showed a significant divergence.
Data shows that large state-owned banks and some city commercial banks performed well, while several joint-stock banks faced pressure. The net investment income of China Construction Bank, Industrial and Commercial Bank of China, and Postal Savings Bank of China in 2025 increased significantly by 129.46%, 54.62%, and 39.96% year-on-year, respectively. Among them, China Construction Bank's income from this item surged from 21.417 billion yuan in 2024 to 49.144 billion yuan in 2025, leading the market with a year-on-year growth rate exceeding 100%.
It must be said that large banks have keenly sensed the gradual changes in the social financing structure.
Ji Zhihong, Vice President of China Construction Bank, stated at the 2025 annual report performance conference that last year, CCB increased its allocation efforts in financial investments such as bonds, making the group's balance sheet more resilient. He revealed that CCB closely followed the changes in the social financing structure, actively adapted to the new development pattern of the bond market, and increased bond asset allocation. The annual government bond investment reached 2.8 trillion yuan, ranking among the top in the market.
"Currently, the scale of bonds held by CCB has exceeded 12 trillion yuan, which is relatively large. To effectively enhance value contribution, we have become more proactive and flexible in our investment strategy, actively seizing market opportunities. At relatively low interest rate levels, we increased bond sales, revitalizing a significant amount of existing holdings," Ji Zhihong said.
Industrial and Commercial Bank of China also seized the opportunities in last year's bond market.
ICBC's 2025 annual report mentioned that other non-interest income was 91.973 billion yuan, an increase of 22.6% over the previous year, of which the increase in investment income was mainly due to increased realized gains from bond and equity investments.
Yao Mingde, Vice President of ICBC, pointed out at the performance conference that last year, the bank's major asset allocation placed more emphasis on long-term reserves. In 2025, the outstanding social financing stock increased by 8.3% year-on-year, of which government bonds increased by 17.1% year-on-year. "The proportion of bond investment in social financing scale in the whole society continued to rise. ICBC fully leveraged its role as a leading bank in supporting national strategies and stabilizing the overall economic situation, achieving a 19.6% growth in bond investment."
At the same time, some city commercial banks also demonstrated flexible adaptability. Bank of Chongqing's net investment income in 2025 reached 2.758 billion yuan. The bank explicitly stated in its annual report that the increase in investment income mainly stemmed from gains from bond disposals and fund investments this year.
Looking at the contribution of net investment income to net profit attributable to the parent company, there are significant differences among banks. For Postal Savings Bank of China and Bank of Wuxi, this income accounted for as high as 50.78% and 54.26% of their net profit attributable to the parent company, respectively, indicating a relatively obvious phenomenon of investment income replenishing bank profits. In contrast, the ratios for Industrial and Commercial Bank of China, China Construction Bank, and China Merchants Bank were relatively lower, at 17.17%, 14.50%, and 24.53%, respectively.
Zhang Ting, Vice President of Industrial Bank, mentioned at the performance briefing that in recent years, the investment and trading income of Industrial Bank's financial markets business has maintained rapid growth, mainly derived from fixed-income coupon income, trading gains, and derivative income. "The Industrial Bank Capital Operation Center, which bears this responsibility, saw its assessed operating income increase by nearly 9 billion yuan over three years, making a positive contribution to the bank's overall revenue growth."
"Against the backdrop of narrowing interest margins, bond investment will contribute non-interest income through capital gains and leverage strategies, becoming an important engine for banks to achieve revenue growth," pointed out Lou Feipeng, a researcher at Postal Savings Bank of China. He added that banks need to improve the accuracy of their bond pricing quantitative models and enhance the diversity of trading strategies and risk hedging capabilities under stress tests.
Regulatory Warnings to NBFIs on Excessive Leverage and "Herd Effect"
While the bond market plays an "anchor" role on the bank side, at the NBFI level, due to their smaller capital scale compared to banks and relatively bolder and more aggressive trading strategies, their potential risks have also attracted high vigilance from regulators.
Also in a column of the "2026 First Quarter Monetary Policy Execution Report," the central bank clearly pointed out that "excessive leverage and maturity mismatch by non-bank financial institutions are also important factors triggering risks." This aligns with market observations of some NBFIs adopting more aggressive trading strategies in pursuit of returns.
Cao Yuanyuan, former Deputy Secretary-General of the National Association of Financial Market Institutional Investors (NAFMII), pointed out at the Fourth China-UK Financial Services Summit on January 11, 2025, that China's bond market liquidity has significantly improved, with the turnover rate of some key-maturity "active bonds" reaching up to 10 times.
The increase in market activity is accompanied by the accumulation of risks. A year and a half earlier, on December 30, 2024, NAFMII organized a symposium with some market investment institutions. According to official information released after the meeting, participating institutions generally believed that "a large amount of funds has flowed into the bond market this year, market interest rates have fallen too rapidly, and interest rate risks have gradually emerged." This directly highlighted the risks hidden by market overheating driven by funds.
In response to market risks, regulatory agencies have continuously intensified their efforts in recent years. NAFMII has made cracking down on secondary market违规交易 a key focus of its work. At that time, typical penalty cases were concentrated in some small and medium-sized banks. In April 2024, NAFMII announced the initiation of self-regulatory investigations into six small and medium-sized financial institutions.
Entering 2025, regulation further escalated and became more focused on NBFIs. According to NAFMII's "NAFMII Reports on Self-Regulatory Investigation and Punishment of违规行为 in the Interbank Bond Market in 2025" released on January 19, 2026, a total of 143 self-regulatory sanctions were imposed throughout the year, involving 108 institutions. The report specifically pointed out that for the first time, it investigated and punished违规行为 such as "securities company investment advisors arranging bond holdings on behalf of others and assisting in non-market-based bond issuance," and imposed sanctions on trading违规行为 by NBFIs such as "trust and futures asset management companies." This shows that regulatory oversight has penetrated deep into the trading chains of NBFIs.
In addition to ex-post punishment, regulators have frequently issued forward-looking warnings about potential market risks. In August 2024, Xu Zhong, Vice President of NAFMII, clearly stated, "Since the beginning of this year, a large amount of funds has flowed into the bond market, leading to a narrowing or even flattening of bond market term spreads and credit spreads, showing a certain degree of bubble tendency to some extent."
Regarding irrational trading behaviors in the market, regulatory agencies used the clear expression "herd effect." At the aforementioned symposium on December 30, 2024, participating institutions pointed out that "due to fear of missing trading opportunities, the herd effect among investors is prominent, requiring regulatory departments and self-regulatory organizations to strengthen expectation guidance."
Looking ahead to optimization measures, Ming Ming stated, "Currently, there is differentiation in bond liquidity and insufficient refinement in credit pricing in the bond market, with small spread differentiation. In the future, by optimizing investor structure, improving credit pricing, and健全ing duration and stress testing systems, cross-market trading and refined risk control capabilities can be enhanced."
Lou Feipeng suggested, "NBFIs should establish dynamic leverage monitoring mechanisms, set strict maturity mismatch limits to prevent the accumulation of liquidity risks. At the same time, regulation needs to strengthen穿透式 management, monitoring fund flows and leverage levels in real-time. Furthermore, investor education needs to be enhanced, promoting risk-neutral concepts, and improving stress testing and contingency plans."
Lu Jinfei, Senior Deputy Director of the Financial Business Department at Dongfang Jincheng, pointed out that from a bank's perspective, there is still room for further improvement in the current bond market in three aspects: pricing, trading, and risk control.
"First, in pricing, institutions generally rely on external ratings and market inertia. Independent credit research and internal valuation systems are relatively weak. Price discovery for non-active bonds and weaker credit entities is insufficient. The guiding effectiveness of the yield curve across levels and maturities needs to be strengthened. Second, in trading, investment behaviors are明显同质化. Many institutions focus on allocation over trading, lacking market-making and波段 operation capabilities. The use of interest rate derivatives and hedging tools is limited. The linkage between primary and secondary markets and the ability for dynamic portfolio adjustment still need strengthening. Third, risk management needs to be more refined. Currently, some institutions'穿透 monitoring and dynamic stress testing of interest rate risk, credit risk, and liquidity risk are still relatively粗放. Risk-return constraint mechanisms, stop-loss mechanisms, and risk-adjusted return考核 systems still need further improvement," Lu Jinfei stated.
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