Chinese banks’ loan growth forecast lowered to 6% by 2028

Economic data likely indicates continued weak credit demand in the coming months.

Chinese banks’ loan growth estimates by 2028 have been lowered as demand remains weak, although fee income growth is expected to turn positive in 2025.

May 2025 loan demand stayed weak, exacerbated by ongoing local government debt swap, said Morningstar Equity Research in a July 2025 report. For Q1 2025, major banks are experiencing a 2 to 4-percentage-point decline year-on-year.

With the central bank loosening policy loan targets for Q1, Morningstar cut its 2028 loan growth estimate to 6%, from 6.5% previously.

“Economic data likely indicates continued weak credit demand in the coming months,” it said in the report.

Loan growth for state-owned, joint-stock, city, and rural commercial banks was 8.9%, 4%, 8.1%, and 6%, respectively in March 2025; this is down from 13.6%, 10.5%, 15%, and 15% during the 2019-2023 credit boom, it said.

Total social financing (TSF) growth was 8.7% for the quarter, driven by a 21% growth in government bonds, the highest since 2020. However, TSF is expected to gradually slow to 7% by 2028 on slowing property and household deleveraging, Morningstar Equity Research said.

“Retail, namely nonmortgage household loans, risks continued to rise, albeit at a modest pace. The property developer and retail sectors remained key sources of loan risk,” the report said.

Meanwhile, the expansion of credit approvals for eligible borrowers drives an improvement in developers’ nonperforming loans (NPL) ratios and bond default rates.

“We expect earlier loan quality improvement for major banks with concentrated exposure to top-tier firms compared with smaller peers,” Morningstar Equity Research said, noting that top developers saw a 29% YoY increase in financing for the first five months of 2025.

On a more positive note, Chinese banks’ fee income outlook improves for 2025 amidst higher trading activity and stable fee rates.

Policy easing lifting the economy will support credit quality. Capital injection is a long-term positive.

Credit costs are expected to start normalizing in 2027 and beyond.

“We expect credit costs at major banks to bottom in 2025, and they should normalize gradually in 2026 and beyond, as NIM pressures ease and banks are encouraged to implement countercyclical loan provisioning policies,” it said.