Nominal GDP is improving but bond yields have not moved up in tandem, with ample liquidity explaining short-term divergence.

Overview

The report discusses the divergence between improving nominal GDP and the lack of a rebound in bond yields, and analyzes what this means for Chinese financials, especially the bank segment. It notes that strong exports, PPI turning positive, and policy liquidity operations together influence financial asset returns; in the near term yields may remain stable or volatile, but there is a foundation for a gradual recovery in the medium term.

Core views

The core view is that Chinese financials are gradually returning to a positive growth cycle. Although bond yields have not clearly rebounded in the near term due to abundant liquidity and seasonal loan-growth slowdown, easing PPI pressure, credit-pricing focus shifting back, stable new-loan pricing in 1Q26, sequential NIM recovery, and declining industrial credit risk all support improving financial asset returns and bank earnings. Real-estate market stabilization will be an important catalyst over the next two years.

Analysis framework

The report evaluates the trajectory of financial asset returns by combining macro data, bank discussions, central bank liquidity operations, loan growth pace, net interest margin, and credit-risk changes, and then maps these to outlooks for bank revenue, profit, and valuation re-rating. At the stock level, it uses a three-stage dividend discount framework to estimate target valuations.

Methodology notes

• Valuation methodThree-stage dividend discount model

  Valuation by scenario-weighted probabilities across base, bull, and bear cases.

  Bank of Ningbo valuation uses 60% base case, 20% bull case, and 20% bear case. The base-case discount rate is 11.4%, long-term ROE assumption is 13%, and long-term payout ratio is 61%, with an implied 2026E P/B of 1.2x for the target price. China CITIC Bank H-shares also use the three-stage dividend discount model, with a base-case discount rate of 10.0%, and use an RMB-to-HKD rate of 1.13 and a 10% discount for H-shares.

• Macro and bank fundamental analysisLiquidity, loan pricing, and financial asset return framework

  Assess financial asset return trends through nominal growth, PPI, central bank liquidity operations, loan demand, and net interest margin.

  The report argues that foreign-exchange settlement from strong exports and loan growth moderation after 1Q26 explain yield stability, but declining PPI pressure, stabilized new-loan yields, sequential NIM improvement, and falling industrial credit risk support subsequent financial asset return recovery.

Asset mapping & comparison

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

• Chinese bank stocks

  Direct beneficiary asset

  Strengths

  Loan pricing stabilization, sequential net interest margin improvement, declining industrial credit risk, and sector view Attractive.

  Weaknesses

  Bond yields have not clearly rebounded in the short term, and loan growth is experiencing seasonal moderation.

  Comparison

  The report favors Bank of Ningbo, the four major state-owned banks, and China CITIC Bank H-shares.

  Risks

  Deterioration in asset quality, weaker fee income growth, policy intervention, and pricing pressure from competition.

• Chinese government bonds

  Macro rate observation focus

  Strengths

  Abundant liquidity supports yield stability, and banks view current yield levels as conducive to taking profits.

  Weaknesses

  The lack of a yield rebound despite nominal GDP improvement indicates short-term divergence between macro growth and rates.

  Comparison

  Compared with bank stocks, bond yields more strongly reflect liquidity conditions and policy operations.

  Risks

  PBOC liquidity absorption, loan demand recovery, or shifts in PPI pressure could drive yield volatility.

• Ningbo Bank Co. Ltd

  Top-pick stock

  Strengths

  The report states Bank of Ningbo remains its Top Pick, with an implied 2026E P/B target of 1.2x.

  Weaknesses

  Expansion in SMEs and retail could bring higher default risk.

  Comparison

  Compared with the sector average, the report assigns a higher preference.

  Risks

  Management changes, asset quality stress, and pricing pressure from disruptive competition.

• China CITIC Bank Corporation Limited H-shares

  Favored stock

  Strengths

  The report expects China CITIC Bank H-shares to perform well, with upside potential from fee income growth outpacing expectations and reduced policy intervention.

  Weaknesses

  The H-share valuation incorporates a 10% discount, indicating continued market discounting.

  Comparison

  Relative to A-shares or other banks, H-share target valuation should incorporate FX and discount assumptions.

  Risks

  Deteriorating macro trends could weaken asset quality, fee income could miss or slow growth, or social responsibility pressure could persist.

Key data

• Nominal GDP growthclearly improvedSupported by strong export growth and PPI returning to positive territory.
• Bond yieldshave not rebounded recently and have declinedReport charts show government bond yields have recently declined while PBOC liquidity absorption has also been observed.
• Factors behind stable bond yieldsample liquidity; seasonal slowdown in loan growth after 1Q26Bank discussions indicate that export growth and greater USD-to-RMB conversion generated liquidity, while loan growth after a strong 1Q26 trend has cooled.
• Bank of Ningbo valuation assumptions60% base, 20% bull, 20% bear; base discount rate 11.4%; implied 2026E P/B 1.2xFrom the valuation methodology and risk disclosure sections.
• China CITIC Bank H-shares valuation assumptionsbase discount rate 10.0%; long-term payout ratio 40%; RMB/HKD exchange rate 1.13; 10% H-share valuation discountFrom the valuation methodology and risk disclosure sections.
• Sector viewAttractiveThe report states the Asia-Pacific sector view is Attractive.

Impact & implications

If financial asset yields rise gradually, China’s banking sector could benefit from more stable loan pricing, improving net interest margins, stronger fee income, and lower credit risk, thereby supporting better revenue and profit trends and underpinning sector re-rating. Stable short-term bond yields also mean banks can capture some income through bond trading, but ongoing improvement still depends on deflation easing and property stabilization.

Risks

• Deteriorating economic trend may lead to a decline in asset quality.
• Fee income grows slower than expected.
• Changes in policy intervention could affect bank profitability and valuation.
• Expansion in SME and retail businesses could increase default risk.
• Intensifying market competition could create loan pricing pressure.
• If progress toward real-estate stabilization falls short, improvement in financial asset returns may weaken.

What to watch

• Whether PPI continues to improve and ease deflationary pressure.
• The pace of central bank liquidity absorption and its impact on bond yields.
• Whether new-loan yields and bank net interest margins continue their stabilized-to-improving trend seen in 1Q26.
• Whether industrial credit risk continues to decline.
• Whether the Chinese property market gradually stabilizes.
• Changes in bank fee income, wealth management income, and asset quality.