City Rural Commercial Bank tightens its proprietary private placement bonds and ABS investments

Under the predicament of “asset scarcity,” some institutions are investing in relatively high-yield exchange-traded private placements and ABS, with the city commercial banks being one of them.

However, the aforementioned investment behavior of city commercial banks has been disturbed by inquiries from local regulatory authorities recently, with reports indicating that their self-operated private placements and ABS investments may be tightened.

According to multiple fixed-income professionals from banks and securities firms interviewed by Caixin, some regional regulators have reiterated the regulatory red line set out in Document No. 81 jointly issued by the CSRC, the central bank, and the former CBIRC in 2019 during their inquiries into local city commercial banks. It clearly states that bank proprietary accounts can only participate in the bidding for on-exchange bond cash transactions, and non-publicly issued corporate bonds (private placements) and asset-backed securities (ABS) cannot be traded on fixed-income platforms since they are not listed on the centralized bidding system.

As of the time of this report, some city commercial banks have already halted their relevant proprietary investment plans. The earliest rumors indicate that “all banks’ proprietary trading in the primary market of the exchange is paused,” which is inaccurate; banks’ primary bidding for exchange bonds can still proceed normally.

A financial market professional from a city commercial bank in the Yangtze River Delta told Caixin that currently, the regulatory authorities are only in the inquiry stage and have not formally required banks to implement any changes. Further assessments will depend on the feedback from each bank, and different interpretations of the regulatory inquiries may lead to varying guidance across regions.

At this moment, it is still unclear about the investment situation of city commercial banks in proprietary private placements and ABS. From a broad data perspective, according to fixed-income reports compiled by Tianfeng Securities (Rights Protection), as of the end of February 2026, the self-operated holdings of public corporate bonds, private corporate bonds, and ABS by banks were 715.6 billion yuan, 1.24 trillion yuan, and 437.1 billion yuan, respectively, accounting for 9%, 20%, and 24%.

Market analysts state that, overall, the proportion of private corporate bonds and ABS held by banks is relatively high, but this is national data, and the proportion held by city commercial banks is not large. Additionally, many city commercial banks do not have trading accounts on the exchange, so the impact of the current restrictions on bond issuance may have a limited overall effect on the credit bond market.

Driven by high yields, city commercial banks have become important buyers of exchange-traded private placements and ABS.

Industry insiders explain that the core proprietary vehicle for city commercial banks’ bond investments is the FVOCI account, which measures at fair value and includes changes in other comprehensive income (commonly referred to as the OCI account in the industry). This account can hold bonds to obtain stable coupons and can also sell in the secondary market to seek capital gains. The fair value changes do not directly erode current net profits; only upon selling do accumulated gains and losses transfer to current profits and losses, matching the allocation needs for private placements and ABS.

According to a financial market department insider from a city commercial bank in East China, there is a high proportion of exchange-traded private placements and ABS included in the OCI accounts, while only a few trading varieties are included in the TPL account, and they are almost never placed in the AC account, which has strict holding-to-maturity requirements, “mainly to facilitate subsequent profit adjustments.”

Caixin notes that one of the core logics for city commercial banks to aggressively layout exchange-traded private placements and ABS is the “asset scarcity” predicament under sustained pressure on net interest margins.

Since 2025, domestic bond market interest rates have continued to decline, and the net interest margin of commercial banks has dropped to historical lows.

According to the National Financial Regulatory Administration, as of the end of 2025, the net interest margin of city commercial banks was only 1.37%, significantly lower than the 1.56% of joint-stock banks and 1.60% of rural commercial banks, only slightly higher than the 1.30% of state-owned banks. However, compared to state-owned banks that have stabilized and rebounded their core capital adequacy ratio after receiving capital injection from the Ministry of Finance, some city commercial banks face high liability costs and a scarcity of quality high-yield assets, which has become a core pain point in their operations.

According to data compiled by Caixin from Wind, as of March 26, 2026, the Shanghai Stock Exchange ABS market had a cumulative transaction of 8,037 cases, a significant year-on-year increase of 24.12% compared to 6,475 cases in the same period of 2025; excluding subsidized ABS, the highest yield to maturity for all market transactions reached 20.18%, with a median of 2.41% and an average yield of 1.90%, among which the highest-yielding varieties mostly came from infrastructure-related ABS.

“For our regional city commercial banks, we cannot compete with state-owned banks and joint-stock banks for the issuance of high-grade interbank market bonds and central enterprise credit bonds; the amount we can acquire does not cover our liability costs at all,” a financial market department insider from a non-listed city commercial bank in East China told Caixin directly. “The exchange-traded municipal investment private placements and infrastructure ABS have much higher coupons than similar-rated varieties in the interbank market, with some county-level varieties even exceeding 100 basis points, and the entry threshold for primary subscriptions is low, making it the core means to enhance yields.”

Multiple fixed-income underwriting professionals from securities firms revealed that currently, in the primary market subscriptions for weak-quality municipal investment private placements and infrastructure ABS on the exchange, the contribution from city commercial banks’ proprietary accounts is generally high, with some county-level platform varieties accounting for over 80%, making them important buyers in the market while also actively participating in the daily secondary market trading segment.

Reaffirmation of old regulations rather than new regulations may directly address risk prevention.

Industry insiders point out that the core basis of this regulatory action is not the introduction of new regulations but the strict implementation of the 2019 Document No. 81.

Caixin’s review of the “Notice on Issues Related to Banks’ Participation in Bond Trading on the Securities Exchange” (CSRC Announcement [2019] No. 81) found that its core rigid clauses clearly state that banks meeting the access conditions can participate in bidding for bond cash transactions on the exchange.

In the view of industry insiders, this clause delineates two major boundaries: first, the type of transaction is limited to cash transactions only, and second, the trading method is limited to centralized bidding, while agreement transfers, block trades, etc., are not within the scope defined by the document.

It is worth noting that the systems that can participate in exchange bond trading include not only the centralized bidding trading system but also the comprehensive electronic trading platform for fixed-income securities.

According to previous reports by Caixin, both the centralized bidding trading system and the comprehensive electronic trading platform for fixed-income securities can participate in secondary market bond trading. The difference lies in that the centralized bidding trading system matches trades, with buy and sell sides quoting anonymously, and the system automatically completes transactions based on the “price priority, time priority” principle, with China Clearing acting as the central counterparty (CCP) for centralized clearing; while the fixed-income platform operates through market-maker quotes and agreement transactions, with primary dealers providing bilateral quotes, and investors making trades through inquiry and negotiation, belonging to the over-the-counter (OTC) model.

Several industry insiders told Caixin that after the issuance of Document No. 81, the market generally interpreted it as a “liberalization document” for banks’ participation in the exchange bond market, focusing on the expansion of access subjects from pilot banks to city commercial banks and foreign banks in China. However, there has long been a misunderstanding of the compliance boundaries of trading channels, and over the years, regulators have not strictly corrected operations beyond the scope, leading to city commercial banks’ proprietary trading directly participating in the secondary trading of private placements and ABS on the exchange, which has gradually become a common practice in the industry.

In the view of a chief analyst of fixed income from a leading securities firm, if regulatory tightening indeed occurs in the future, the core may have two main demands. The first is to strictly control credit risks among small and medium-sized banks. Currently, city commercial banks’ holdings of regional municipal investment private placements and ABS are highly concentrated, and they may lack strict due diligence and risk control, relying heavily on implicit guarantees from local governments. The second may be to strictly block loopholes in the management of local government implicit debt. “Since exchange-traded private placements and ABS are one of the financing channels for some county-level municipal investment platforms to circumvent implicit debt regulation, bank proprietary funds may be the main undertakers.”

Some industry insiders also pointed out that regulatory tightening may also prevent localized overheating and the resurgence of shadow banking, with the core intention being to guard against some local banks using exchange-traded private placements to carry out disguised “credit downscaling” and “leverage increase” across regions.

It is noteworthy that if the reaffirmation of this regulatory red line emphasizes bidding transactions, market insiders believe it may put pressure on county-level municipal investment private placements and weak-quality infrastructure ABS that heavily rely on city commercial banks’ proprietary accounts, and some city commercial banks with stricter risk control may trend towards transferring relevant positions back to the interbank market, increasing holdings of high-grade medium-term notes and short-term financing bonds.

Caixin’s statement: The content of the article is for reference only and does not constitute investment advice. Investors bear the risk based on their operations.