Why China’s stock market boom could be baneful news for state-owned banks

Central bank data points to Chinese retail investors leaping into stocks

China’s stock market has seen a tech-led surge since the start of 2025, handily overcoming the headwinds generated by Trump’s Liberation Day tariffs.

Some domestic pundits are concerned, however, that the equity boom could undermine China’s all-important state-owned banking system, by accelerating the process of disintermediation and sapping them of deposits.

Others argue that China’s banks should take full advantage of the rise of the domestic capital market, by using wealth management products (WMP) to make investments on behalf of their retail clients.

This would help to spur the emergence of stock and bond markets as a key source of funding for China’s tech sector, while giving Beijing another powerful tool for staging further market interventions.

Tech sector and state intervention spur China’s stock boom

China’s stock market has surged in 2025, despite the market uncertainty created by Trump’s tariff war and mounting tensions between Washington and Beijing.

The Shanghai Composite Index hit a decade-long high last week, posting a year-to-date rise of nearly 20%, while the Shenzhen Composite Index has lifted more than 30% since the start of the year.

The Hong Kong market is also booming, with the Hang Seng Tech Index, comprised of 30 of China’s biggest listed tech companies, up 41% year-to-date.

A key catalyst for the rise in China’s stocks has undoubtedly been the landmark successes of the nation’s tech sector on the global stage.

These include the shock debut of Deepseek in the field of AI, as well as the growing popularity of Chinese EVs in offshore markets and the burgeoning promise of state-supported semi-conductor development.

Chinese economists also point out that explicit policy interventions by Beijing have played a key role in stabilising the domestic stock market, spurring subsequent price gains by offering firm reassurance to investors.

Just following the launch of Trump’s Liberation Day tariffs at the start of April, Chinese sovereign fund Central Huijin announced that it would increase its holdings in A-share ETFs, as part of efforts to stymie stock market volatility.

Stabilising both the stock and property markets has been a top priority for China’s policymakers in 2025. They want the wealth effects of rising asset prices to spur domestic consumption, helping to compensate for the headwinds of Trump’s trade war.

Zhang Yu (张瑜), a researcher from Renmin University’s International Monetary Research Institute, highlights the impact of such government interventions on the appetites of China’s retail investors, who had previously been rattled by the capricious performance of domestic stocks.

“For capital markets, the current round of equity allocations has highlighted the cost-effectiveness of the current period, as a result of the clear interventions of China’s policies to stabilise the capital market,” Zhang wrote in a recent opinion piece (”张瑜：存款搬家如何向实体经济传导？——2025年8月金融数据点评”).

“This has preemptively reduced equity volatility, effectively boosting risk-adjusted returns.”

She points in particular to changes in household deposit data as a key sign of greater stock market activity by Chinese retail investors.

“The current round of equity market activity will primarily be tracked by changes in household deposit flows,” Zhang writes.

China’s retail investors leap on board stocks

Wang Jian (王剑), special researcher at Renmin University’s International Monetary Policy Institute, said the mounting enthusiasm of China’s retail investors for domestic stocks is well attested by changes in the central bank’s money supply and bank deposit data.

He points in particular to greater growth in the category of non-bank financial deposits (非银金融存款), in tandem with easing growth in personal demand deposits and term deposits.

Non-bank financial deposits are created when Chinese investors transfer their bank deposits to securities investment accounts, or when they buy asset management products.

A rise in non-bank financial deposits, in tandem with slowing, or even negative, growth in personal term and demand deposits, means that Chinese households are moving out of bank deposits and into stocks or other financial investments.

“Everyone is paying attention to the ‘rehousing of deposits,’ which points to a shift in funds from bank deposits to financial market investments, such as shares and asset management products,” Wang wrote in a recent opinion piece (“王剑：存款搬家了”)

“Detailed data from the end of July already shows signs of deposit rehousing. The increase in personal term deposits is still the highest for all categories, but the scale of increase is declining, with some of these funds already used for investment.

“This has caused gains in non-bank financial deposits to rise markedly.”

Wang notes that longer-term data points to this as a trend that has emerged over the past several years.

Growth in personal term deposits hit a record 16 trillion yuan in 2023, but subsequently fell in 2024 and 2025.

By contrast, growth in non-bank financial deposits was 2.29 trillion yuan in 2023, before rising to 3.11 trillion yuan in 2024, and to 5.16 trillion yuan for the first seven months of 2025.

Wang argues that this ongoing shift in the deposit structure is a positive development for China’s economy, as it indicates that households have greater confidence in the future and are thus more willing to consume and invest.

“When the share of personal term deposits rises, this represents comparatively weak willingness to engage in future consumption or investment,” Wang writes.

“When we see a restoration of confidence in the future...then we will see an increase in demand deposits (as opposed to term deposits), which will be a positive sign.

“When things are even better, ordinary people will withdraw from their term deposits to consume and invest.”

Lu Zhengwei (鲁政委), chief economist at Industrial Bank Co., says the latest raft of credit data from the Chinese central bank indicates that this trend remains ongoing.

In his analysis of central bank figures from August (”鲁政委：资金继续活化——评2025年8月金融数据”), Lu highlights a divergence in the growth of new renminbi deposits.

Growth in household deposits in August declined, while non-bank financial deposit growth expanded and enterprise deposit growth held flat compared to the previous month.

“The decline in household deposit growth and the acceleration in non-bank financial deposits could reflect household deposits being allocated to the share market instead,” Lu wrote.

Fear China’s stock boom could enervate banks

While Wang Jian considers the shift in deposit composition to be a positive sign for China’s stock market and the nation’s broader economic health, other pundits say it’s a worrying development for the mammoth banking sector, which remains the mainstay of the financial system.

This is because the erosion of the deposit base could deprive commercial banks of the matter they need to make loans.

Some may argue that deposits are unnecessary because Chinese banks - like banks anywhere - can create IOU money ex nihilo.

It’s nonetheless the case that the Chinese financial system operates under the pretense that banks are intermediaries passing money from depositors to borrowers, with a money multiplier amplifying this process and reserve requirements serving as an adjustment mechanism.

Li Yang (李扬), director of the National Institution for Finance & Development (NIFD) and former deputy-head of Chinese Academy of Social Sciences (CASS), previously opined that low interest rates - in particular low deposit rates - could lead to disintermediation of the banking sector, by triggering an exodus of funds towards China’s capital markets.

“Low interest rates have been accompanied by a critical phenomenon which is extremely rare in China,” Li said.

“This is funds flowing away from the balance sheets of banking-sector financial institutions, towards non-bank financial institutions or the financial market itself - what’s known as ‘disintermediation.’”

Leading financial commentator Mo Kaiwei (莫开伟) argues that this is precisely what is now happening to the Chinese banking sector, due to low deposit rates in tandem with the surge in domestic share prices.

“If banks remain indifferent to the trend of low deposit rates causing deposits to rehouse...then there is the possibility of major losses in operations,” Mo wrote in an opinion piece (“莫开伟：银行应加大力度拓展理财产品业务”).

“Not only will a large volume of deposits flow out, leading to an increase in the difficulty of raising funds, it could even weaken their ability to support the real economy with lending.

“This will cause them to vainly lose opportunities to earn huge operating revenues via intermediation.”

Chinese banks as state-owned capital market allocators

Xi Jinping is currently pushing for capital markets to play a greater role in the Chinese financial system, in the hope of using their heightened efficacy to supercharge the development of domestic tech sector.

If alarmists over disintermediation are to be believed, then there is a zero-sum game between the established banking system and China’s capital markets, with the rise of the latter arriving at the expense of the former.

Mo Kaiwei argues, however, that the rise of the capital market can be reconciled with the established state-owned banking system, by giving institutional lenders a greater role as intermediaries that allocate the funds of retail investors to stocks and bonds.

He says that they can achieve this by making increased use of wealth management products (WMP) - well-established financial instruments that Chinese banks have long sold to their retail clients.

“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,” Mo writes.

WMPs are used by banks to raise funds to invest in specific assets on financial markets, obtaining returns that are allocated to investors based on contractual agreements.

Banks only accept authorisation to manage funds from clients, with risk and returns borne by such clients or both parties in accordance with the stipulations of their agreements.

This means commercial banks do not guarantee the principal or returns for WMPs, and actual returns are determined by their investment performance.

As such they differ from conventional bank deposits, which represent obligations by banks to provide money to clients that are not attached to specific assets or investments, while also enjoying the additional protection of deposit insurance.

Mo argues that Chinese banks should use WMPs to shore up their role as specialist intermediaries, taking advantage of their vast institutional expertise to invest in stocks and bonds on behalf of retail clients who supply them with funds.

This would enable the state-owned banks to maintain or even augment their role in the financial system, just as Xi pushes for greater development of China’s capital markets.

“Vigorously expanding WMPs will enable banks to use their resources to play a role in optimising allocation, with their greater ability to manage investments and control risk,” Mo writes.

The trend could also make state-owned banks a more effective tool for the Chinese government to influence the stock market as part of “stabilisation measures,” in a manner similar to the purchase of A-share ETFs by sovereign wealth fund Central Huijin, just following the launch of the Liberation Day tariff war in April.