Bond Financing Supports July Aggregate Financing, While Loan Contraction Highlights Weak Credit Demand

Overview

China's new aggregate financing to the real economy totaled RMB1.4 trillion in July. Although lower than RMB3.4 trillion in June, it exceeded both RMB1.1 trillion a year earlier and market expectations. Growth in direct financing through government bonds, corporate bonds, and equity financing offset the contraction in loans, indicating a continued shift in the financing mix from bank credit toward direct financing.

Core views

Outstanding aggregate financing growth remained stable at 7.4% year on year, while RMB loan growth fell further from 5.2% in June to a new low of 5.1%. Both medium- to long-term corporate loans and short-term financing contracted, while household loans also declined by RMB460 billion, indicating that credit demand related to investment, mortgages, and consumption remains weak. This trend may constrain bank asset growth, asset yields, and net interest margins in the second half of 2026; however, deposit migration to non-bank institutions such as wealth management products is expected to lower funding costs, while technology company IPOs may also boost investment income at banks' AICs and subsidiaries.

Analysis framework

The report examines monthly changes in aggregate financing, RMB loans, deposits, and money-supply growth, breaks down contributions from government bonds, corporate bonds, equity financing, corporate loans, and household loans, and uses this to assess asset-side and liability-side implications for China's banking sector.

Methodology notes

• Macro-Financial AnalysisAggregate Financing Analysis

  Uses aggregate financing to measure broad financing obtained by the real economy from the financial system.

  Reviews loan, government bond, corporate bond, and equity-financing channels together to determine whether weakening bank credit is being offset by direct financing.

• Bank Fundamental AnalysisBalance Sheet and Net Interest Margin Analysis

  Assesses the transmission of loan demand, asset yields, and deposit costs to bank profitability.

  Weak loan demand is unfavorable for asset growth and yields, while deposit migration to non-bank institutions may improve banks' funding costs.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Construction Bank 0939.HK

  Explicitly preferred in the report

  Strengths

  Its corporate banking business is robust and is more likely to benefit from expanding direct financing and integrated financial demand from corporate clients.

  Weaknesses

  Broadly weak loan demand will still constrain asset growth and pressure net interest margins.

  Comparison

  Relatively more resilient than peers with weaker corporate banking foundations and greater retail loan exposure.

  Risks

  Further weakening in corporate financing demand, declining asset yields, and deterioration in macroeconomic and credit risks.

• Bank of China 3988.HK

  Explicitly preferred in the report

  Strengths

  Its corporate banking business is robust and may benefit from bond financing, cross-border activities, and integrated financial services.

  Weaknesses

  Sector-wide weak credit demand may still weigh on loan growth and profitability.

  Comparison

  Relatively better positioned than banks more affected by weak retail credit demand.

  Risks

  Continued contraction in credit demand, pressure on net interest margins, and changes in market interest rates and the macro environment.

Key data

• New Aggregate Financing in JulyRMB1.4 trillionAbove market expectations of approximately RMB1.1 trillion; RMB3.4 trillion in June.
• New RMB Loans in July-RMB340 billionLargest contraction on record; -RMB50 billion in July last year.
• Year-on-Year Growth in Outstanding Aggregate Financing7.4%Remained stable.
• Year-on-Year Growth in RMB Loans5.1%Below 5.2% in June, reaching a record low.
• Government Bond Financing in JulyRMB1.3 trillionRMB768 billion in June and RMB1.2 trillion in July last year.
• Corporate Bond Financing in JulyRMB454 billionRMB401 billion in June and RMB275 billion in July last year.
• Equity Financing in JulyRMB113 billionSupported by increased listings of AI technology companies.
• Corporate Loans in July-RMB130 billionIncluding a RMB230 billion decline in medium- to long-term loans, a RMB250 billion decline in short-term financing, and a RMB376 billion increase in bill financing.
• Household Loans in July-RMB460 billionHad increased by RMB265 billion in June.
• Deposits of Non-Bank Financial Institutions in July+RMB1.1 trillionReflects the continued migration of deposits to wealth management products.
• M2 Year-on-Year Growth7.7%Below 8.0% in June; M1 year-on-year growth remained at 4.0%.

Impact & implications

Accelerating direct financing can support aggregate financing in absolute terms and reflects stronger fiscal support, but it cannot eliminate the pressure on bank operations from insufficient credit demand. Relatively speaking, banks with strong corporate banking capabilities that can benefit from bond financing and integrated financial services are more defensive; lower funding costs and improved investment income are important subsequent earnings buffers.

Risks

• Persistently weak corporate and household credit demand, leading to further deceleration in loan growth.
• Weaker balance-sheet expansion and asset yields, placing pressure on net interest margins.
• Continued household deleveraging, with mortgage- and consumer loan-related credit risks not yet clearly bottoming out.
• If bond financing increasingly substitutes for loans, banks' traditional lending income may come under pressure.
• Changes in fiscal policy, interest rates, exchange rates, and the macroeconomy may affect fixed-income and bank asset performance.

What to watch

• Whether government bond issuance and fiscal support continue to accelerate.
• Whether corporate bond and equity financing can continue to offset the contraction in loans.
• The recovery of medium- to long-term corporate loans, household mortgages, and consumer loans.
• The impact of deposit migration to wealth management products and non-bank institutions on bank funding costs and fee income.
• Changes in M1, M2, and aggregate financing growth, as well as banks' net interest margins and investment income performance.