China banks: PBOC eases structural funding and the MoF subsidizes first-home mortgages

Overview

This UBS Greater China Banks Daily reports policy measures aimed at lowering funding costs, expanding targeted credit support and reducing first-home mortgage costs. It also notes quarter-end deposit competition among smaller banks and provides a valuation snapshot for covered China banks.

Core views

The PBOC announced three enhancements to structural monetary tools intended to promote economic growth. First, it cut the one-year pledged supplementary lending (PSL) rate by 25bp to 1.5% and broadened the eligible-project scope. Rather than broadly defined infrastructure, PSL funding will explicitly support six critical physical and digital networks, including water-management systems, modernized power grids and computing infrastructure. UBS presents this as lower-cost funding for a more specifically defined investment set. Second, the technology-innovation and equipment-upgrade relending quota was increased by RMB200bn to RMB1.4trn. The PBOC also lifted its funding-support ratio from 60% to 100%, increasing the degree of central-bank funding support associated with this facility. Third, agricultural and small-business relending and rediscount quotas increased RMB500bn to RMB4.85trn; RMB300bn of the increase is earmarked for private businesses. The report interprets that allocation as signaling a regulatory effort to stabilize private-sector credit demand. The Ministry of Finance will begin a one-year mortgage-interest subsidy programme on 1 October for first-time homebuyers. It provides a 1% annualized subsidy on newly issued commercial mortgages for as long as five years, which UBS says effectively reduces prevailing first-home mortgage rates by roughly one-third. Eligibility is limited to homes priced below RMB1.5mn and no larger than 120 square metres, with subsidized loan principal capped at RMB1mn per household. The measure directly lowers borrowing costs for qualifying buyers. The report also notes a contrasting funding-market development: ahead of National Day and quarter-end regulatory checks, regional and private banks have temporarily raised deposit rates to attract funding. Some rural commercial banks offered holiday products with rates up to 55bp above standard offerings and tiered pricing by deposit size. Leading private banks reintroduced five-year deposits above 2%; Fujian OneBank quoted 2.1% for a five-year time deposit, while Hunan Sanxiang Bank showed 2.0% for a two-year deposit. Additional policy and macro items include SAFE-reported August 2026 goods-and-services trade of RMB5.12trn, with exports of USD424.3bn, imports of USD329.9bn and a USD94.4bn surplus. Outstanding full-currency external debt was USD2.50trn at end-June. Separately, policy banks had deployed more than RMB100bn since September from an RMB800bn quota for new policy financial instruments, supporting about 400 projects, chiefly as base capital for areas such as renewable energy and semiconductors. For its China-bank coverage, UBS states that H-share price targets are derived from a three-stage dividend discount model, while A-share targets, including Bank of Ningbo, use a P/B-to-ROE methodology. The valuation tables show a mixed set of stock ratings rather than a single sector-wide recommendation.

Analysis framework

UBS summarizes reported policy and market developments, quantifies changes in lending facilities and mortgage support, and places them alongside its China-bank coverage valuation table. It values H-share banks using a three-stage dividend discount model and A-share banks using P/B relative to ROE.

Methodology notes

• Valuation methodsDDM (Dividend Discount Model)

  Three-stage dividend discount model for H-share China banks

  UBS derives H-share bank price targets by discounting dividends across three stages, linking valuation to expected shareholder distributions over time.

• Valuation methodsPB valuation

  P/B-to-ROE valuation methodology for A-share China banks

  UBS derives A-share targets by relating price-to-book valuation to expected return on equity, including for Bank of Ningbo.

Asset mapping & comparison

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

• China banks

  Covered banking sector affected by targeted monetary easing, mortgage support and deposit-rate competition

  Strengths

  Structural facilities expand targeted credit funding and mortgage subsidies lower eligible homebuyer borrowing costs.

  Comparison

  UBS applies a three-stage DDM to H-share banks and P/B-to-ROE valuation to A-share banks.

  Risks

  Asset-quality, regulatory, funding-liquidity and medium-term interest-rate liberalization risks.

Key data

• One-year PSL rate1.5%Cut by 25bp
• Technology innovation and equipment-upgrade relending quotaRMB1.4trnIncreased by RMB200bn; funding-support ratio raised from 60% to 100%
• Agricultural and small-business relending and rediscount quotaRMB4.85trnIncreased by RMB500bn, including RMB300bn for private businesses
• Mortgage interest subsidy1% annualized for up to five yearsFor eligible newly issued first-home commercial mortgages from 1 October
• Mortgage eligibility limitsHome price below RMB1.5mn; floor area no more than 120 sq m; subsidized principal up to RMB1mn per householdApplies to the first-time-homebuyer programme
• August 2026 trade surplusUSD94.4bnExports were USD424.3bn and imports USD329.9bn
• Policy-financial-instrument deploymentOver RMB100bnDeployed since September from an RMB800bn quota, supporting about 400 projects

Impact & implications

The report presents the policy package as reducing targeted funding costs, enlarging credit capacity for technology, equipment, agriculture, small businesses and private firms, and lowering mortgage costs for qualifying first-time buyers. It also highlights that smaller banks were competing more aggressively for deposits around quarter-end.

Risks

• Asset quality could deteriorate if the macro environment and domestic property market weaken.
• Changes in capital, liquidity or off-balance-sheet regulation could create regulatory risk for banks.
• Loan rollovers and longer asset durations could weaken funding structure and balance-sheet liquidity.
• Medium-term interest-rate liberalization could pressure bank profitability.