Isolated government interventions fail to resolve the underlying challenges of diminishing profitability and deteriorating asset quality within China’s banking sector, according to a report by Natixis Asia Research. While state-engineered initiatives—including massive debt swaps, multi-billion-yuan capital injections, and rewritten capital frameworks—have successfully propped up regulatory solvency ratios, they do not address the systemic vulnerabilities plaguing these institutions.
Alicia Garcia Herrero, Natixis CIB chief economist for APAC & Middle East, alongside senior economist Gary Ng, pointed out that Chinese banks are no longer capable of generating organic capital because of weakened profitability and ongoing asset quality pressures. They noted that these institutions are walking a tightrope, trying to fulfill state policy objectives while managing deep structural headwinds.
Beijing’s RMB 10 trillion ($1.48 trillion) debt swap program has provided crucial breathing room, shielding lenders from imminent defaults tied to local government financing vehicles (LGFVs). This restructuring successfully converted RMB 14 trillion ($2.07 billion) of off-balance-sheet hidden debt from 2023 into official government bonds. Natixis estimates that China swapped RMB 4.1 trillion ($606.46 billion) in debt in 2024 and another RMB 3.9 trillion ($576.88 billion) in 2025, boosting the banking system’s capital adequacy ratio by 19 basis points and 13 basis points, respectively. Although the program is set to continue over the coming years, economists expect the pace of these swaps to decelerate.
Simultaneously, the revised capital regulations implemented in January 2024 have cushioned balance sheets by lowering risk weights on exposures to corporations, households, and general local government bonds. Outlined in the Natixis China Banking Monitor 2026, these adjustments successfully reduced the ratio of risk-weighted assets (RWA) relative to total assets down to 60% in 2025, compared to 62% in 2023.
Direct state funding has further inflated capital buffers. The government injected RMB 520 billion ($76.92 billion) into state-owned commercial banks in 2025, with plans to deploy an additional RMB 300 billion ($44.38 billion) in 2026 to elevate system-wide capital ratios. Garcia Herrero and Ng emphasized that without this ongoing state intervention, the industry’s capital adequacy ratio would have entered a downward trajectory as early as 2024.
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