China's Stock Market Surge: Opportunity or Threat for State-Owned Banks?

China's Stock Market: A Double-Edged Sword for State-Owned Banks

Since the dawn of 2025, China's stock market has experienced a remarkable tech-driven rally, successfully navigating the turbulence caused by external trade tariffs. This surge, however, has ignited a significant debate among financial commentators regarding its long-term implications for China's crucial state-owned banking sector. While some view the equity boom with optimism, others are apprehensive, fearing that it could undermine the banks' foundational role by accelerating a process known as disintermediation, potentially draining them of their vital deposit base. Conversely, a school of thought advocates for China's banks to strategically capitalize on the burgeoning domestic capital market. By actively promoting Wealth Management Products (WMPs) to invest on behalf of their retail clients, banks could not only safeguard their position but also contribute to the emergence of stock and bond markets as a primary funding channel for China's innovative tech sector. This approach would additionally equip Beijing with a potent new mechanism for future market interventions.

The 2025 Market Phenomenon: Driven by Tech and State Support

China's stock market in 2025 has demonstrated robust performance, largely shrugging off the uncertainties generated by trade conflicts and rising geopolitical tensions. The Shanghai Composite Index recently achieved a ten-year high, reflecting a nearly 20% year-to-date increase, while the Shenzhen Composite Index climbed by over 30% since January. The Hong Kong market has also participated vigorously, with the Hang Seng Tech Index, tracking thirty of China's largest listed technology companies, recording an impressive 41% gain year-to-date.

This upward trajectory has been propelled by several key factors. A major catalyst is undoubtedly the groundbreaking achievements of China's technology sector on the international stage. These include the unexpected entry of Deepseek into the artificial intelligence arena, the increasing global appeal of Chinese electric vehicles (EVs), and the promising developments in state-supported semiconductor research and production. Furthermore, Chinese economists underscore the critical role played by explicit policy interventions from Beijing. These measures have been instrumental in stabilizing the domestic stock market, fostering subsequent price gains by instilling confidence among investors.

For example, in the wake of renewed tariffs in April, China's sovereign wealth fund, Central Huijin, announced plans to increase its holdings in A-share Exchange Traded Funds (ETFs) as a strategic move to mitigate stock market volatility. Stabilizing both the equity and property markets has been a paramount objective for Chinese policymakers throughout 2025. Their aim is to harness the 'wealth effect' of appreciating asset prices to stimulate domestic consumption, thereby offsetting the economic pressures exerted by global trade disputes. Zhang Yu, a researcher at Renmin University's International Monetary Research Institute, highlights how these government actions have positively influenced the behavior of China's retail investors, who had previously been hesitant due to the market's volatile nature. Zhang noted that such clear policy interventions have effectively reduced equity volatility and enhanced risk-adjusted returns, with changes in household deposit data serving as a key indicator of increased retail participation.

The Great "Deposit Rehousing": Retail Investors Embrace Equities

The growing appetite among China's retail investors for domestic stocks is clearly evidenced by shifts in the central bank's money supply and bank deposit statistics, as highlighted by Wang Jian, a special researcher at Renmin University's International Monetary Policy Institute. He specifically points to a noticeable rise in "non-bank financial deposits" (银行金融存款), which has occurred concurrently with a deceleration in the growth of personal demand and term deposits. Non-bank financial deposits typically originate when Chinese investors transfer their funds from traditional bank accounts into securities investment accounts or when they purchase asset management products.

This trend—characterized by an increase in non-bank financial deposits alongside slowing or even negative growth in personal term and demand deposits—signifies a clear migration of household funds from conventional bank deposits into stocks and other financial instruments. Wang aptly terms this phenomenon the "rehousing of deposits," indicating a systemic shift. He further explains that data from the end of July already provided early signals of this rehousing, noting that while personal term deposits still represent the largest category of increase, their growth rate is diminishing as funds are channeled into investments. Consequently, non-bank financial deposits have seen a marked increase.

Observing long-term data, Wang confirms that this trend has been developing over several years. Personal term deposit growth, after reaching an unprecedented 16 trillion yuan in 2023, subsequently declined in both 2024 and 2025. In contrast, non-bank financial deposits expanded from 2.29 trillion yuan in 2023 to 3.11 trillion yuan in 2024, surging further to 5.16 trillion yuan within the first seven months of 2025. Wang interprets this evolving deposit structure as a positive development for China's economy, reflecting a renewed sense of confidence among households, leading to a greater propensity to consume and invest. Lu Zhengwei, chief economist at Industrial Bank Co., echoes this sentiment, with August's credit data from the central bank further confirming the ongoing divergence in new renminbi deposits, where household deposit growth slowed while non-bank financial deposits accelerated.

The Perilous Path: Disintermediation and Bank Vulnerability

While some experts like Wang Jian view the changing deposit landscape as a healthy sign for China's stock market and the broader economy, others perceive it as a critical concern for the nation's immense banking sector, which remains the bedrock of the financial system. The primary anxiety stems from the potential erosion of the deposit base, which could deprive commercial banks of the essential capital required to extend loans. Even though some argue that banks, like anywhere else, can create money "ex nihilo," the Chinese financial system traditionally operates on the premise of banks acting as intermediaries, channeling funds from depositors to borrowers, with a money multiplier effect and reserve requirements managing this process.

Li Yang, director of the National Institution for Finance & Development (NIFD) and former deputy-head of the Chinese Academy of Social Sciences (CASS), previously cautioned that persistently low interest rates, particularly on deposits, could instigate disintermediation within the banking sector. He described this as a rare yet critical phenomenon in China, involving funds migrating away from bank balance sheets towards non-bank financial institutions or directly into the financial markets. Leading financial commentator Mo Kaiwei contends that this is precisely the scenario unfolding within the Chinese banking sector, driven by the combination of subdued deposit rates and a surging domestic share market. Mo warns that if banks fail to address the trend of deposits shifting due to low rates, they face the "possibility of major losses in operations." This could lead to substantial deposit outflows, increasing the difficulty of fund-raising and potentially diminishing their capacity to support the real economy through lending, thereby causing them to "vainly lose opportunities to earn huge operating revenues via intermediation."

Reimagining Banks: Capital Market Allocators for a New Era

President Xi Jinping's administration is actively promoting a more prominent role for capital markets within China's financial system, aiming to leverage their efficiency to boost the domestic tech sector. If the alarmists' concerns about disintermediation hold true, it implies a zero-sum conflict between the established banking system and China's capital markets, where the ascendancy of one inevitably diminishes the other. However, Mo Kaiwei proposes a more harmonious co-existence, arguing that the growth of the capital market can be reconciled with the state-owned banking system. He suggests that institutional lenders can assume an expanded role as intermediaries, skillfully directing retail investor funds into stocks and bonds.

This can be achieved by significantly increasing their utilization of Wealth Management Products (WMPs), well-established financial instruments that Chinese banks have long offered to their retail clientele. Mo highlights that "Banks can use the expansion of WMP sales to effectively respond to declines in deposit rates, and offset the losses brought about by the fall in deposits." WMPs enable banks to gather funds from clients and invest them in specific assets within financial markets, with returns subsequently allocated to investors based on contractual agreements. Banks typically manage these funds as authorized agents, with the investment risks and returns primarily borne by the clients or shared as stipulated in their agreements. This crucial distinction means commercial banks do not guarantee the principal or returns for WMPs, as actual returns depend entirely on investment performance, differentiating them from conventional bank deposits that are obligations with deposit insurance protection.

Mo advocates for Chinese banks to use WMPs to bolster their position as specialized intermediaries, leveraging their extensive institutional expertise to invest in capital markets on behalf of retail clients. This strategic adaptation would allow state-owned banks to maintain, and potentially augment, their influence within the financial system, aligning seamlessly with President Xi's broader agenda for capital market development. Moreover, this approach could empower state-owned banks to become a more effective instrument for the Chinese government to influence the stock market as part of broader "stabilization measures," similar to the actions taken by Central Huijin during periods of market uncertainty.