In 2023, the landscape of banking in China underwent noticeable changes, especially concerning the lending and investment behavior of state-owned banks versus joint-stock banksAs the world's second-largest economy continued to navigate the post-pandemic recovery process, the role of state-owned banks as major drivers of credit supply was underscoredTheir ability to accelerate loan investments was juxtaposed against the cautious pace of credit growth observed in joint-stock banks, raising questions about the underlying dynamics of financing needs in an evolving economic context.

During this period, the aggregate performance metrics revealed a positive growth divergence between loan investments and financial investment for state-owned banks—indicating a robust lending strategyIn contrast, joint-stock banks exhibited a scenario where their loan growth lagged behind investment growth

This phenomenon was largely attributed to a sluggish resurgence in the demand for real economy financing, echoing themes of cautious fiscal prudence among banks with joint-stock ownership structures.

The investment strategies implemented by banks, particularly through self-operated investments, remained significant constituents of their financial healthFor the past five years, the proportion of self-operated investment assets among listed banks consistently hovered around 28% to 29%. This segment had increasingly become crucial for radiating profitability, with reported revenues from self-operated investments contributing more substantially to overall banking resultsFrom 2012 to the mid-2023 period, the share of self-operated investment revenues as a proportion of total bank performance surged from 1.39% to an impressive 8.76%.

Analyzing the balance sheets unveiled a well-structured approach to self-operated investments, categorized into trading financial assets, debt investments, other debt investments, and various equity investment tools

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The period between 2018 and the first half of 2023 saw consistent trends, with debt investments comprising the largest share at 62% to 64%. This was closely followed by other debt investments forming 20% to 23%, while trading financial assets maintained around 14% to 15%. Other equity tool investments remained a minor player, ranging between 0.05% to 2.5%.

The introduction of new financial instruments and accounting standards marked a significant milestone, leading to a reconstructed classification for financial assets into categories labeled as AC (Amortized Cost), FVOCI (Fair Value Through Other Comprehensive Income), and FVTPL (Fair Value Through Profit or Loss). By the end of the third quarter of 2023, self-operated investments in listed banks reflected an overall skew towards AC and FVOCI, representing a substantial 84.34% share of total portfolios—of which AC was 63.66%, FVOCI at 20.68%, while FVTPL accounted for 15.66%.

Overall, the lending activities of banks remained prioritized as a vital asset class, suggesting a passive correlation with investment allocation levels

Increased margins in lending versus deposit growth typically heralded an uptick in financial investment, illustrated by the cases of Agricultural Bank of China and Zhejiang Merchants Bank in 2023. The convergence between lending and investment growth rates appeared to shift dramatically, particularly for prominent joint-stock banks like Postal Savings Bank, Bank of Communications, China Merchants Bank, and Industrial Bank.

Statistical data revealed that by the end of 2023, the credit growth rate of state-owned banks stood at a formidable 12.9%, outpacing financial investment growth by 0.6 percentage pointsIn contrast, joint-stock banks experienced a credit growth rate of only 7%, trailing behind their financial investment growth, indicating a strategic realignment in asset management and investment risk appetites.

Further analysis highlighted the narrowing margins concerning the lending to investment growth rate differential for both state and joint-stock banks

Over the full year, there was an observable tightening for state-owned banks, particularly in the second half, likely driven by a passive configuration of local government bondsConversely, joint-stock banks increased their lending-to-investment growth rate gap primarily because of the earlier pacing of their bond allocations, resulting in decreased investment growth rates in the latter half of the year.

Despite the contrasting trajectories illustrated between state-owned and joint-stock banks, both categories of entities displayed an underlying theme—state-owned banks showcased a steady allocation toward debt provisions, while joint-stock banks experienced a relative pullback in financial investment growth ratesIn 2023, it was noted that the year-on-year financial investment growth rate for state-owned banks reflected at 12.27%, a slight reduction from the third quarter yet indicative of sustained high allocation rates, capped at 35% against interest-earning assets

On the other hand, joint-stock banks saw their financial investment growth decline to 8.19% by dropping 2.41 percentage points compared to earlier quarters.

Different categories of banking institutions adopted distinct self-operated investment philosophies, responding to varied regulatory and market pressuresThe investment assets were often categorized into positioning investments (corresponding to AC and FVOCI) and trading-style assets (aligned with FVTPL). From 2018 to the first half of 2023, banks maintained a robustly conservative investment stance, with positioning investments comprising approximately 85% of their self-operated portfolios and trading assets accounting for a modest 15%.

This taxonomy further delineated the structure of self-operated investments as over 92% of the underlying asset investments—spanning bonds, equities, and mutual fund investments—were categorized as traditional, stable assets, highlighting the cautious approach banks took towards innovative or riskier financial products.

Amid a backdrop of complex external conditions, banks were compelled to carefully navigate the interplay of risk and return within self-operated investments

Internal constraints primarily stemmed from the demands tied to asset-liability managementBanks routinely established take limits concerning the interest rate risk exposures tied to bond investments while ensuring profitability amid internal funding transfer pricing demands, impacting the cost of capital for self-operated investment allocations.

On the regulatory front, external influences constrained self-operated investment types and scopes significantly; laws dictated stringent guidelines regarding capital adequacyThis external pressure often pushed banks towards investment offerings that favored capital-efficient asset categories and were perceived as lower risk, such as local government bonds, and investment-grade corporate credit bonds, all of which were subject to flexible credit risk weighting adjustments under regulatory frameworks—encouraging preferential treatment for compliant assets.

The shifting focus towards liquidity management introduced an additional layer of challenge

Banks aiming to meet liquidity coverage ratio (LCR) standards tended to prioritize investments in government bonds, financial government bonds, and top-rated municipal bonds, very much reflecting the stringent nature of oversight in the current banking landscape.

By the second quarter of 2023, self-operated investment scales for listed banks reached approximately 77.24 trillion yuan, which marked an increase of 21.7 trillion yuan since 2019. The period of 2019 to 2021 saw the mitigating effects of interbank regulations take hold, while liquidity conditions remained favorable albeit with muted demand for tangible credit, which consequently buoyed annual growth ratesHowever, 2023 presented new challenges characterized by tightening regulatory constraints and base size effects leading to rapid declines in growth.

Amid shifting regulatory climates, the segment of standardized assets reflected a notable rise, with bonds asserting their dominance in the investment framework

Between 2018 and mid-2023, the proportion of standardized assets soared—from 84.21% to 91.83%—with bond investments significantly dominating the self-operated investment landscape throughout.

Differing liability costs among bank classifications produced divergent investment strategiesObserving specific examples illustrates that banks under greater capital pressure selectively heightened their holdings of government debt to reduce high-risk weight assetsFor instance, the data from the latter half of 2023 revealed that Bank of Communications and CITIC Bank exhibited a significant increase in low-risk-weight government bonds while concurrently trimming back on higher-risk assets.

Furthermore, banks with acute liquidity management demands shifted their focus towards interest-bearing assets