China’s provinces asked to bail out risk-fraught regional banks
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China’s provinces asked to bail out risk-fraught regional banks<br>Local government debt and state control of credit could rise once again as a consequence.
CBaN Editor<br>Mar 20, 2026
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China’s top economists and bankers remain highly concerned about the potential for the ailing health of regional lenders to trigger a financial crisis.<br>They’ve called for local governments to help bail them out, by issuing special bonds to fund capital injections for unsteady balance sheets.<br>While the move would bolster China’s beleaguered smaller banks, it could also compound long-standing problems with the financial system.<br>These include the immense leverage burden of local governments, as well as the collusion between regional officials and lenders which has historically been a source of debilitating debt risk.<br>Leading pundits argue, however, that increasing local government influence over regional banks via bailouts will prove advantageous for the Chinese economy, by enhancing the state’s ability to control credit allocation and tightening the coordination of fiscal and financial policy.<br>Share<br>Get smarter about China’s inner economic workings. Consider becoming a free or paid subscriber.
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China’s smaller banks still source of crisis anxiety
Liu Ya (刘亚), a representative to the National People’s Congress and party secretary for the Beijing branch of China Export-Import Bank, voiced concern about the capital health of smaller lenders at the Two Sessions congressional event held in March.<br>“Capital is a reflection of the operating strength of banks,” she said during an interview at the sidelines of the Two Sessions.<br>“For small and medium-banks, it is of the utmost importance when it comes to stable and healthy development, absorbing losses and the prevention of risk,”<br>Prominent financial commentator Mo Kaiwei (莫开伟) echoed Liu’s concerns in a follow-up opinion piece entitled “China’s Small and Medium-sized Banks Urgently Need the Establishment of Long-term Effective Mechanisms for Capital Supplementation” (“莫开伟：我国中小银行亟需构建资本补充长效机制).<br>“High-risk institutions are concentrated in the small and medium-sized banking system, and their lack of sufficient capital buffers could readily trigger regional financial risk,” Mo writes.<br>“It is very clear that expanding support for capital supplementation by smaller banks has become an extremely urgent task.”<br>As of the end of 2025, the core tier-1 capital adequacy ratios for all categories of Chinese banks were safely above the regulatory baseline.<br>They stood at 17.56% for the large-scale commercial banks and 13.43% for the joint-stock banks - the traditional mainstays of the Chinese banking sector.<br>For municipal commercial banks and rural commercial banks - considered smaller lenders, the figures stood at 12.63% and 12.22% respectively.<br>Mo points out, however, that some of the smaller municipal and rural commercial banks have “already seen their capital adequacy ratios fall to quite low levels, with some posting on-quarter declines.”<br>He further notes that the bad debt levels for certain regional lenders have reached perilous heights, while the Chinese banking sector as a whole still faces headwinds which will continue to diminish the health of their balance sheets.<br>“At present, China’s small and medium-sized banks suffer from constraining factors such as low profit levels and high non-performing asset ratios,” Mo writes.<br>“On top of this, China’s economic growth is slowing, with the trends of financial risk prevention, crack downs on malfeasance and strict regulation still ongoing.<br>“The return of corresponding operations to balance sheets will further accelerate the erosion of capital at smaller banks, affecting their capital adequacy ratios to varying degrees.”<br>Smaller regional banks have remained an acute source of concern for China’s financial authorities for much of the past decade - despite ownership by the state and tight oversight by regulatory agencies.<br>In 2019 Yi Gang, the then-governor of China’s central bank highlighted problems with asset quality at China’s smaller lenders, stating that a rise in NPLs comprised the greatest threat to the stability of the banking sector.<br>The summer of that year saw the failure of three regional lenders - Inner Mongolia’s Baoshang Bank, Bank of Jinzhou in Liaoning and Shandong’s Hengfeng Bank.<br>In May 2019 the Chinese central bank and the China Banking and Insurance Regulatory Commission (CBIRC) made the bold move of taking over Baoshang Bank - the first such nationalisation of a Chinese commercial lenders in more than two decades.<br>The episode marked the end of implicit government guarantees for Chinese financial institutions, with creditors to the trio of capsized banks left to eat their losses.<br>It also ushered in a wave of mergers and takeovers of China’s smaller regional lenders, in a bid to shore up the sector’s overall health.<br>Share
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