China's banks shift into government bonds as mortgage and consumer lending contracts

Chinese banks have increased their holdings of government debt to 16.4 per cent of total assets as of July, up from 11.5 per cent five years earlier, according to People's Bank of China data compiled by Bloomberg News on 8 September. Over the same period, claims on residents — a category comprising mortgages and consumer loans — declined to 16.4 per cent of assets from 20.3 per cent. The two shares are now equal. Household loans, including mortgages, shrank by 460.3 billion yuan in July, according to Reuters calculations based on PBOC data.

The reallocation follows a sustained contraction in Chinese credit growth. New yuan loans fell by 340 billion yuan in July, the largest decline on record, according to Reuters calculations based on PBOC data, while growth in outstanding total social financing held steady at 7.4 per cent. New loans totalled 10.38 trillion yuan in the first seven months of the year, down from 12.87 trillion yuan a year earlier.

BOND INCOME REPLACES LOAN INCOME

The earnings consequences of the shift are becoming visible in interim disclosures. At Agricultural Bank of China, bond purchases accounted for more than 90 per cent of the growth in interest income during the first half of 2026, according to Bloomberg News.

While government bond yields have surged across major developed markets as investors demanded greater compensation for holding longer-dated debt, China has remained an outlier, with a stable and rallying sovereign market. The yield gap between Chinese and US 10-year sovereign bonds widened to the widest level on record following a drop in Treasuries, underscoring the divergence.

RECAPITALISATION MEETS WEAK DEMAND

The shift comes as Beijing makes its latest capital injection into the banking system. The Ministry of Finance is issuing special sovereign bonds to fund an equity injection into eight state-owned financial institutions, in a recapitalisation valued at approximately $54 billion. Commentary published by Reuters Breakingviews on 7 September argued that the recapitalisation may achieve its least important aim.

Economists polled by Reuters expected new August yuan loans of around RMB 400 billion, well below the RMB 590 billion recorded a year earlier.