Changpeng Wan
The Unprecedented Rally
A torrent of capital flooded China’s stock markets in July 2025, propelling banking shares to extraordinary heights. For the 33rd time this year, the banking sector index shattered historical records as the Shanghai Composite reclaimed the 3500-point threshold with conviction. This banking bonanza formed the bedrock of broader market gains, with weekly trading volume exploding to 7.48 trillion yuan – the highest in four months. Financial giants now command valuations unseen since the 2015 peak, yet institutions remain steadfast in their optimism.
Foundations of Momentum
The banking rally rests on three pillars:
- Record trading liquidity elevating sector momentum
- Regulatory tailwinds improving asset quality
- Corporate dividend policies anchoring investor confidence
The Dividend Dilemma
As prices surge, fears about stretched valuations center on dividend yields. The Big Four banks now offer historically modest returns: Bank of China (3.81%), Agricultural Bank of China (3.83%), ICBC (3.81%), and China Construction Bank (3.90%) all hover below the sector median of 3.91%. Compare this to their 2014 highs when yields exceeded 7%, or even the 2015 peak between 3.19-4.30%. Banking stocks last traded at these valuation extremes during the 2016-2018 cycle, before correcting sharply.
Historical Parallels and Pitfalls
The current dividend compression mirrors previous inflection points. Major pullbacks followed each valuation peak:
- 2015 correction: 30% sector plunge
- 2018 tumble: matching 30% decline
- Today’s test: banks trade at similar yield spreads
Institutional Bullishness
Despite these red flags, major analysts advocate persistence. Changjiang Securities research indicates banking stocks remain intrinsically attractive: “While surface-level dividend yields might suggest caution, our analysis shows structural advantages,” noting expanding spreads between bank dividends and government bonds. With 10-year yields languishing near 1.6%, banking returns provide relative shelter.
Citi’s Sector Thesis
Citi strategists add perspective: “Shareholder-friendly policies create revaluation catalysts. Any pullback would trap investors hunting yield – Chinese bank valuations aren’t inflating irrationally.” They estimate redistribution tailwinds too – household equity allocations remain proportionally low compared to Western markets. Each 1% reallocation would funnel over ¥5 trillion into equities.
Profitability Pathway
Broader banking fundamentals shine brightly according to CITIC Securities analysis. Three converging trends could yield 5-6% net profit growth:
- Deposit rate reforms squeezing funding costs
- Special bond issuance boosting fee income
- Optimized property policies relieving NPL pressures
Huafu Securities’ Cross-Asset View
Capital migrations amplify the opportunity:
- Insurance funds scaling banking allocations
- Yield-starved pensions shifting portfolios
- Private capital rotating into defensive equities
Stratified Opportunities
Joint-stock lenders generate particular institutional excitement according to Huatai Securities. They outperform peers across three dimensions: stronger delinquency resolution, expanding market share, and resilient dividend buffers. Huatai Securities Analyst Li Ming (李明) declares: “The systemic rerating hasn’t exhausted joint-stock banks’ recovery trajectory.”
Sector Rotation Strategy
Horizon Outlook
The banking rally seems poised for continuity, not capitulation. Hua An Securities expects seasonal tailwinds to emerge in Q4 as monetary easing coincides with improving economic indicators. Interest rate and credit cycles suggest banking stocks traditionally outperform during liquidity transitions – precisely where markets now stand.
- Monitor People’s Bank of China liquidity operations
- Track corporate bond yield spreads weekly
- Assess quarterly results for net interest margin trends
Tactical Allocation Framework
Strategic Conclusions
Despite legitimate valuation debates, banking stocks maintain institutional favor through structural strengths. Their critical role in China’s financial ecosystem creates embedded advantages absent from other sectors. Investors should:
- Prioritize banks demonstrating margin improvement
- Emphasize institutions diversifying revenue streams
- Track State Council’s policy roadmap
The weight of institutional capital suggests banking stocks haven’t exhausted their rally. Careful positioning in quality lenders remains prudent as broader markets test major inflection thresholds. Visit China Banking Regulatory Commission for compliance updates.
