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The Chinese banking sector has witnessed remarkable growth in 2023, with major state-owned banks posting impressive stock price surges. The Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), China Construction Bank (CCB), Bank of China (BOC), and Postal Savings Bank have all recorded significant increases in their stock values, making headlines for this unexpected uptrend.

As of August 22, 2023, ICBC's stock price soared by a staggering 43.50%, while ABC followed closely with a 44.03% rise. CCB, BOC, and Postal Savings Bank also showcased substantial increases of 34.53%, 35.06%, and 25.46%, respectively. Collectively, the market capitalization of the banking sector reached an astounding 12.37 trillion yuan on this date, just shy of the February 2018 figure of 12.51 trillion yuan. Intriguingly, the cumulative market value of these six banks has eclipsed that of the ChiNext board, a milestone previously deemed improbable for the traditional banking stocks.

The meteoric rise in the valuations of these behemoths raises an essential question: what has contributed to such remarkable growth in a sector previously characterized by skepticism and volatility? It is critical to note that not all banks have fared well during this financial period, as evidenced by the declines experienced by smaller banks such as Lanzhou Bank, which has fallen by 8.80%, and Zhengzhou Bank, down by 12.44%. Furthermore, banks like Ningbo and Minsheng have notably underperformed relative to their larger counterparts, underscoring a growing divide in market performance within the banking industry.

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Thus, while the six major banks lead the financial landscape, setting new historical highs in stock prices, the overall banking sector is precariously close to reaching its peak market valuation.

The robust performance of these six giants has had a stabilizing effect on the market. During the same period, other indices such as the Shanghai Composite Index and the CSI 300 suffered declines of 4.24% and 3.44%, while the Shenzhen Composite Index and ChiNext dropped even more dramatically by 14.31% and 18.23%, respectively. The resilience of the Shanghai market compared to the Shenzhen market illustrates the vital role the six major banks play in providing market support during tumultuous economic conditions. Notably, without their influential market presence, one can only surmise that the Shanghai index would have fallen below 2848 points.

Furthermore, apart from the banking giants, other state-owned entities like China Mobile, China Petroleum, and China National Offshore Oil Corporation (CNOOC) have risen in prominence, showcasing increased stock prices amid an otherwise bearish market climate. The performance of these "Chinese-characterized" stocks emphasizes their inherent stability and anti-dip attributes, further reinforcing their role in market stabilization.

Underlying the interest in these heavyweight stocks are several compelling factors that attract large funds toward these companies for collective investment. After all, this behavior reveals a strategic approach to mitigating risks during times of uncertainty. For one, these stocks are generally perceived to have strong certainty in returns, avoiding the hazards of sudden policy changes or abrupt declines in earnings. Consequently, investing in these robust companies is a strategy for preserving capital, particularly in a sluggish market environment.

Moreover, allocating resources into large-cap state-owned enterprises facilitates new equity offerings, presenting investors with a dual advantage. According to the current A-share market rules, new stock allocations are based on market capitalization, meaning that holding sizable shares in large firms not only paves the way for favorable stock acquisition during IPOs but also bolsters the overall stability of an asset portfolio, reducing the likelihood of unnecessary investment losses.

Additionally, the A-share market is presently undergoing a bear market phase, reinforcing the necessity for prudent investment strategies. The prolonged downturn can quicken the depreciation of capital, making it crucial to tread carefully. However, with super large-cap stocks, investors can effectively sidestep the risk of rapid asset depreciation. Given their typical characteristics of low valuation and high dividend yields, even if there are short-term losses, holding these securities long-term can counterbalance losses through dividends.

A critical aspect worth investigating is the ongoing liquidity constraint currently affecting over 5,300 listed companies in China's stock market. The average trading volume only exceeds a staggering 500 billion yuan, which is insufficient to meet the liquidity demands of all these firms. This scarcity reinforces the appeal of top-weighted stocks, as they are adept at drawing market liquidity while siphoning off available resources. This trend exacerbates the liquidity challenges faced by smaller entities, as illustrated by the increasing allocation of resources to leading firms, reinforcing the concentration of available liquidity at the upper tier of the market.

With the recent, continued increases of 30-40% in the stock values of the six major banks, their cumulative market capitalization surpasses that of the ChiNext board. This dynamic is indicative of an evolving investment style and a shifting focus within the market. The prolonged ascent of these heavyweight stocks further drains liquidity available to other companies, laying the groundwork for noticeable shifts in investment momentum. Should these key stocks enter a corrective phase, it stands to reason that capital will be redirected to other market players, creating a seesaw effect throughout the financial landscape.