China bank asset quality risks surge on state lending

Relending rates fell by 25 bps to relieve funding pressure on micro and small enterprises.

Chinese banks face risks to their asset quality if large scale lending following recent government measures flow towards vulnerable borrowers, said Fitch Ratings.

The People’s Bank of China recently reduced relending rates by 25 basis points (bps) and lowered minimum down payments for commercial real estate (CRE) to 30% from 50% previously.

These measures are aimed at relieving funding pressures from micro and small enterprises, the private sector, and selected real estate segments, the ratings agency said in a commentary published in January 2026.

Fitch warned that effectiveness of these steps in reviving credit demand remains uncertain. Total loan growth is still forecasted to slow to 6.5% in 2026.

“[Banks] will continue to prioritise underwriting discipline and stability over aggressive expansion,” Fitch said.

It further warned that there is risk that the support measures “may only postpone, rather than resolve, underlying credit issues if their financial profiles do not improve.”

The sectors targeted by the relief measures typically include more vulnerable borrowers, according to Fitch. “Medium-term risks to bank asset quality may rise if large-scale lending flows to vulnerable borrowers.”

The CRE sector is also likely only to see a marginal uplift in transactions following the downpayment cut.

Separately, greater non-bank financial institution (NBFI) involvement in bond investments could heighten the risk of a sharp unwinding if market conditions change, Fitch warned.