(Yicai) July 18 -- Postal Savings Bank of China plans to invest CNY10 billion (USD1.4 billion) to establish an Asset Investment Company, it said yesterday. This will be the fourth such entity launched by a Chinese commercial bank in the past six months as AICs are increasingly seen as a new growth driver for lenders grappling with shrinking net interest margins.

With this move, all six of China’s big state-owned banks have either established or are in the process of establishing AICs. These AICs serve a unique function. They buy corporate debt from banks and through market-based operations, convert these debts into equity stakes in companies. This not only sidesteps regulations that prevent banks from directly holding corporate equity, but also helps achieve several goals, such as reducing corporate leverage, mitigating risks and enhancing the value of assets through professional management.

As net interest margins shrink in the banking sector, AICs are emerging as a new growth driver of bank revenues, a representative from a large commercial bank told Yicai. By leveraging their parent banks’ vast client networks, AICs can quickly reach target companies and offer them integrated solutions that combine equity investment, credit support and settlement services.

The Big Five state-owned banks’ AICs raked in net profit of CNY18.3 billion (USD2.5 billion) in 2024, according to Wind data. This only accounted for 2 percent of their parent banks’ total profits, however their profit growth rate far outpaced that of the parent banks. Between 2018 and 2024, the annual compound profit growth rates for these five AICs was as high as 57.9 percent.

“AICs operate large-scale, long-term investment funds, making them an important source of patient capital in the equity investment market,” the representative said.

For companies receiving investment, backing from bank-affiliated institutions can bring strong credibility. “Receiving capital from a bank-affiliated AIC is equivalent to getting a stamp of approval from a major brand,” several tech company executives told Yicai.

“Because banks and their affiliates operate under strict risk controls, their investments are often seen as signals of quality, which helps invested companies secure additional financing after the initial round,” a local government financial regulator told Yicai.

However, challenges remain in order to turn AICs’ equity investments into a sustainable business model.

“Equity investment naturally comes with a high failure rate, but the banking system has a low tolerance for failure,” a head of investment at a joint-stock bank told Yicai. “Without establishing clear industry-standard mechanisms for due diligence, risk exemptions as well as incentives and restraints, frontline investment teams will struggle to receive incentives when investing in early-stage, small-scale or hard-tech ventures.”

“Under current regulations, the leverage of AICs, both on- and off-balance-sheet, is subject to the same capital management rules as commercial banks, making it difficult for them to use structured finance tools to scale up investments the way the market-oriented private equity funds,” he said.

Apart from Postal Savings Bank, the other five big state-owned banks launched their AICs between 2017. Since March, after about seven and half years, more banks started to follow up three joint-stock banks, including Industrial Bank and Postal Savings Bank, have announced plans to set up their own asset investment subsidiaries.

Editors: Tang Shihua, Kim Taylor