(Yicai) April 19 -- Commercial banks in China, especially smaller rural lenders and large state-owned concerns, are investing heavily in the bond market as loan demand weakens.

Since the start of the year, rural commercial banks, which mostly cater to farmers and rural residents, have been the most active group of institutional investors. They bought CNY132.6 billion (USD18.3 billion) of bonds in the first two weeks of this month, mainly short-term notes and those with maturities of 20 to 30 years, according to Minsheng Securities.

The trend began last year. Bond buying by rural banks in the secondary market accounted for 12 percent of purchases in 2023, per the China Foreign Exchange Trade System. Only brokerages at 34 percent and urban commercial banks at 13 percent bought more.

Banks have more liquidity to spend on bonds as credit demand has waned and depositors are keener on long-term time deposits as interest rates are expected to fall further. Many banks proposed putting greater emphasis on bonds and less on credit at their annual earnings briefings.

Another group under the spotlight is large state-owned lenders. Their net spending on bonds was the biggest among banks last year due to their scale. For example, Industrial and Commercial Bank of China swelled its holdings by CNY1.3 trillion (USD179.5 billion), or 13 percent, from 2022. Agricultural Bank of China and China Construction Bank were two others that joined the CNY1 trillion-plus club last year, per their financial reports.

Bond purchases can be seen as liquidity management. A source in the investment department of a rural bank told Yicai that its headquarters had allocated relatively large amounts to bond investing this year amid difficulties in loan issuance.

“In the face of uncertainty and risks, it is more sensible to invest in bonds which carry lower risk," the person said, adding that they look for high-quality investment targets in this category every day.

But risk increases with herd behavior. Whenever a sudden bond market correction results in an inverted yield curve, risks could pile up quickly for bondholders, especially for banks with lower liquidity and weaker pricing power, according to a financial markets insider at a state bank.

Editors: Tang Shihua, Emmi Laine