With bank profitability in China sagging, government seeks recapitalisation of large banks, mergers for small banks

China’s officials announced last autumn a major programme to recapitalise large banks. Last month, the finance ministry further clarified the initiative by announcing the issuance of 500 billion yuan in special bonds for recapitalising banks. Last week, four large state banks declared they would be offering private placements mainly for the finance ministry. The Bank of China raised 165 billion yuan from its share offering, the Postal Savings Bank 130 billion yuan, the Bank of Communications 120 yuan and China Construction Bank 105 billion yuan. The Postal Savings Bank’s private placement also includes about 12 billion yuan investment in total by the state-owned China Mobile and China State Shipping Corporation (CSSC). The stakes sold by the banks were substantial. For example, the finance ministry acquired a 15.5 % stake in the Postal Savings Bank and a 8.5 % of Bank of China shares. As a result, the government (not including state companies) now holds a two-thirds stake in both of these banks. The offered share prices in all of the private placements was slightly higher than the market prices of the four banks’ shares.

Chinese bank profitability is under pressure. Last year bank profits were down by over 2 %. The only other time when profits have fallen as much during the past quarter century was at the start of the Covid-19 pandemic in 2020. The net interest margin between deposits and loans has steadily eroded in recent years, ending last year at just 1.5 percentage points. Return on equity also fell to 8.1 %. Amidst this decline, banks report that their ratios of non-performing loans to total lending (NPL ratio) have also shrunk to 1.5 % on average. While it is impossible for outsiders to ascertain the actual quality of bank loan portfolios, observers suggest the quality of bank loan portfolios has been worse than reported for years (see BOFIT Discussion Paper 2/2020). Moreover, the economic slowdown, the pandemic and the collapse of the real estate sector are likely to further erode the quality of bank lending portfolios.

Officials have long asserted that the country’s large banks are generally in good shape, even if some small and mid-sized banks face challenges. The current recapitalisation programmes, however, indicate that the officials are also concerned about the stability of large banks, as well as their ability to finance the government’s policy goals and support growth. A great number of small and mid-sized banks operate in China, and their problems bubble up from time to time. Central government officials have for some time encouraged these banks to merge with others to become more profitable entities, while local officials have resisted such moves as they see having their own local banks as crucial. The central government view seems to be prevailing as China last year posted a record number of bank mergers. According to the figures of the National Financial Regulatory Administration, 4,295 banks operated in China at the end of 2024, a drop of 195 banks from end-2023. With just a few exceptions, merged banks were almost always some type of rural bank or rural financial institution.