Chinese banks mask capital weakness with government injections

One-off government support does not address banks’ lower profitability and asset quality issues.

A debt swap, a multi-billion-yuan capital injection, and new capital regulations are just some ways that the Chinese government has boosted its banks’ capital adequacy, reports Natixis Asia Research.

The report warned that these one-off government support has helped banks with their solvency rations but do not solve the root cause of the problem.

“Chinese banks no longer generate organic capital due to lower profitability and asset quality issues,” said Alicia Garcia Herrero, Natixis CIB chief economist for APAC & Middle East; and senior economist Gary Ng.

“It suggests that banks are walking a tightrope in supporting various policy goals, but the challenges remain,” they said.

China’s $1.48t (RMB10t) debt swap has allowed banks to avoid potential losses through local government financing vehicles (LGFVs).

The $2.07b (RMB14t) hidden debt in 2023 has been turned into officially recognised government bonds.

“We estimate that China has swapped $606.46b (RMB4.1t) and $576.88b (RMB3.9t) in debt in 2024 and 2025, which has lifted the capital adequacy ratio by 19 bps and 13 bps respectively,” said Garcia Herrero and Gary Ng.

The scheme will continue in the next few years but at a slower pace, they said.

New capital regulations that took effect in January 2024 have allowed lower risk weights for exposures to corporates, households, and local government general bonds, Garcia Herrero and Ng wrote in the Natixis China Banking Monitor 2026.

As a result of these new rules, the share of risk-weighted assets (RWA) to total assets has been reduced to 60% in 2025, from 62% in 2023.

China has also injected $76.92b (RMB520b) into state-owned commercial banks in 2025, and plans to inject another $44.38b (RMB300b) in 2026. This lifts the system capital adequacy ratio.

“Without government help, the capital adequacy ratio would have fallen in 2024,” Garcia Herrero and Ng said.

(US$1 = RMB 6.76)