China Galaxy Securities has released a research report indicating that August financial data continues to confirm a weak credit environment. However, the pace of deposit outflows has slowed, and with accelerated fiscal spending, attention should be paid to the potential credit-boosting effects of special bonds and new policy-based financial instruments in the coming period.

Furthermore, recent interim results have signaled a stabilizing trend in net interest margins. The logic of fundamental improvement in the banking sector remains intact, with overall performance surpassing 2025 levels, which is favorable for valuation recovery. The firm continues to hold a constructive view on the allocation value of the banking sector.

Where to Focus First: The growth rate of outstanding social financing has declined again, with the year-on-year reduction in new social financing reaching a new high for the year. In August, the year-on-year growth of outstanding social financing stood at 7.18%, down 0.24 percentage points from July and below the June pace. New social financing totaled 1.6577 trillion yuan, a year-on-year decrease of 908.3 billion yuan, marking the largest reduction in any month since 2026. The weakness in August social financing can be attributed to two factors: first, persistently soft demand for real credit, which dragged down overall growth; second, government bond financing turned to a year-on-year decline.

Government Bonds Remain the Primary Driver of Social Financing Growth but Show Year-on-Year Decline, While RMB Loan Increments Continue to Shrink: In August, government bond financing reached 1.0097 trillion yuan, accounting for 61% of new social financing for the month, still the absolute main contributor to social financing growth, albeit down 357.5 billion yuan year-on-year. RMB loans increased by only 55.2 billion yuan, a year-on-year decline of 570.1 billion yuan, reflecting the slow recovery of real-sector financing demand. Corporate bond financing rose by 271.2 billion yuan, an increase of 137.4 billion yuan year-on-year, maintaining rapid growth for several consecutive months. The substitution effect of bonds for loans persists, primarily driven by heightened corporate issuance appetite amid a low-interest-rate environment, though the overall increment was lower compared to June and July. Equity financing amounted to 63.9 billion yuan, up 18.3 billion yuan year-on-year. Off-balance-sheet financing totaled 37.8 billion yuan, a year-on-year decrease of 178 billion yuan, with undiscounted banker's acceptances at 38.2 billion yuan, sharply down 159.1 billion yuan year-on-year, likely related to bill discounting activities.

Household Financing Continues to Decline, Corporate Short-Term Loans Turn Negative, and Effective Credit Demand Remains Weak: In August, financial institutions recorded new RMB loans of 60 billion yuan, a year-on-year decrease of 530 billion yuan. The loan balance growth rate was 4.9% year-on-year, down 0.2 percentage points from July. Structurally, household financing continued to shrink. Household loans decreased by 202.9 billion yuan in August, a year-on-year reduction of 233.2 billion yuan, with short-term and medium-to-long-term loans falling by 121.9 billion yuan and 82.2 billion yuan, respectively, down 132.4 billion yuan and 102.2 billion yuan year-on-year. Household leverage appetite remains persistently weak, as evidenced by commercial housing sales area and sales value declining 12.1% and 13% year-on-year, respectively. In the corporate sector, short-term performance was lackluster, while medium-to-long-term loans contributed to growth and bill financing continued to marginally boost volumes. Corporate loans increased by 260 billion yuan in August, down 330 billion yuan year-on-year, with medium-to-long-term loans adding 320 billion yuan as the main support but still down 150 billion yuan year-on-year. Short-term loans decreased by 160 billion yuan, a year-on-year drop of 230 billion yuan, while bill financing rose by 100 billion yuan, a modest year-on-year increase of 46.9 billion yuan, indicating some continued bill discounting activities. Overall, insufficient effective credit demand remains the core constraint on credit expansion.

Deposit Outflows Slow, Fiscal Deposit Consumption Increases: In August, M1 grew 4.1% year-on-year, up 0.1 percentage points from July, while M2 rose 7.5%, down 0.2 percentage points. The M1-M2 gap narrowed to -3.4 percentage points, reflecting marginal improvement in capital activation. On the deposit front, at the end of August, RMB deposits at financial institutions grew 7.7% year-on-year, lower than July's pace. New RMB deposits for the month totaled 1.2 trillion yuan, a year-on-year decrease of 860 billion yuan. Household deposits increased by only 40 billion yuan, while corporate deposits rose by 280 billion yuan, recovering from the negative growth in July. Non-bank deposits and fiscal deposits showed signs of weakening, with increases of 560 billion yuan and 110 billion yuan in August, down 620 billion yuan and 80 billion yuan year-on-year, respectively. Deposit migration persists but at a slower pace, while fiscal spending has accelerated, with funds being channeled to the real economy.

Risk Warnings: Risks include economic growth falling short of expectations, deterioration in asset quality due to retail non-performing loan exposure, and pressure on net interest margins from declining interest rates.