Analysis: Chinese Banks Require Capital Injection to Support Economic Stimulus Efforts, According to Reuters

By Xie Yu and Sumeet Chatterjee

HONG KONG – As China intensifies its efforts to stabilize its economy through new stimulus measures, analysts have indicated that the country’s leading banks must be capitalized promptly to enhance their lending capabilities. This move is crucial for revitalizing sluggish economic growth and addressing challenges related to asset quality.

The profitability of Chinese banks, already strained by an economic downturn and turmoil in the property sector, is expected to suffer further following the recent announcement of reduced mortgage rates. While major banks are anticipated to lower their deposit rates to mitigate the effects on their profit margins, analysts stress the necessity of a capital influx to effectively manage increasing asset quality issues and potentially support smaller banks.

State-owned banks in China commonly assist smaller and mid-sized lenders that are struggling with inadequate capital reserves, deteriorating asset quality, and limited options for capital acquisition. According to S&P Global Ratings, the four largest Chinese banks required a total loss-absorption capacity of 738 billion yuan (approximately $105 billion) as of the end of June.

Reports suggest that Chinese authorities are considering injecting up to 1 trillion yuan (around $142.39 billion) into the largest state banks to enhance their ability to support a faltering economy. This funding is expected to be primarily sourced from the issuance of special government bonds, marking the first instance of bank capitalization since the global financial crisis.

Xiaoxi Zhang, a finance analyst at Gavekal Dragonomics, noted that the size of the capital injection would depend on the regulatory objectives for the banking system. If the focus is on preventing systemic financial risks, efforts may concentrate on smaller banks. However, addressing the accumulation of bad loans in the banking sector may necessitate a larger capital injection to rehabilitate bank balance sheets.

China’s leading banks are facing challenges related to diminishing net interest margins, declining profits, and mounting non-performing loans amid a slowing economy and ongoing property sector issues. Four of the five largest lenders reported lower profits for the second quarter after receiving directives to reduce lending rates in response to extremely low demand from households and businesses.

In a recent stimulus announcement by Beijing, authorities revealed plans to reduce average interest rates on existing mortgages by 50 basis points and lower the minimum down payment requirements. Analysts believe that while banks may adjust their deposit rates accordingly to dampen profitability impacts, they will still likely experience a decrease in net interest margins, which have already reached record lows. A JPMorgan research note estimated that the overall effect of these rate cuts on net interest margins might be around 3 basis points for 2025.

The central bank has indicated plans to lower the reserve requirement ratio and implement significant interest rate cuts, as outlined in a recent meeting of senior Communist Party officials. Analysts at JPMorgan view this combination of policies as favorable for the banking sector in the short term, estimating that the net impact of the rate cut on earnings will be minimal.

Nevertheless, investment decisions regarding state bank shares may be reconsidered as clarity regarding capital infusion emerges, given concerns about the rising risk associated with national service and uncertainties about medium-term profitability.

At the end of June, the total value of individual mortgages amounted to 37.79 billion yuan (about $5.31 billion), reflecting a 2.1% year-on-year decline and comprising roughly 15% of banks’ overall loan portfolios.

According to Ming Tan, a director at S&P Global Ratings, authorities are likely to prioritize capital injections to riskier institutions while also encouraging stronger banks to absorb their weaker counterparts.