On Sunday, September 6th, the Communist Party of China’s Ministry of Finance announced a capital injection of 360 billion yuan into the largest state-owned banks and insurance companies to support the declining profitability of the financial industry and create a buffer for economic growth. Experts warn that mere book capital increases will not help relieve risks, making the next decade even more challenging for China.
The 8 state-owned financial institutions receiving the capital injection include Industrial and Commercial Bank of China, Agricultural Bank of China, Export-Import Bank of China, China Export & Credit Insurance Corporation (Sinosure), People’s Insurance Group of China (PICC), China Life Insurance Group, China Pacific Insurance, and China Reinsurance.
This move follows Beijing’s announcement in 2025 of injecting 500 billion yuan into major state-owned banks, further expanding the scope of capital support for central financial institutions.
Originally planned to cover only two of the six major state-owned banks, the capital injection was later expanded to include insurance companies and other state-owned holding banks. This marks the first time in 20 years that the Ministry of Finance has injected such a large amount of funds into the insurance industry.
According to the Financial Times, Cheng Tan, founder of Beijing consultancy firm GMF Research, stated that the capital injection into policy banks and state-owned insurance companies came as a surprise. Tan mentioned that the current low interest rates are eroding the profits of insurance companies, weakening their financial cushion. The injection of funds would provide more room for them to invest in the stock market, aligning with the authorities’ goal of directing long-term institutional capital into the market.
Following the announcement of the capital injection, mainland bank and insurance stocks in the Hong Kong market generally fell on Monday (September 7). Industrial and Commercial Bank of China and Agricultural Bank of China dropped by 2.47% and 2.60% respectively. China Life, China Pacific, and China Reinsurance fell by 1.10%, 2.29%, and 2.62% respectively, while PICC rose by 1.71%. Export-Import Bank and Sinosure are not listed on the Hong Kong stock market.
Industrial and Commercial Bank of China and Agricultural Bank of China have begun reassuring investors, stating that the capital increase will be used to enhance their core Tier 1 capital adequacy ratios. Industrial and Commercial Bank also mentioned that through improving operational performance, they will mitigate the dilution impact on existing shareholders caused by additional share offerings.
The background of this capital injection is that there is pressure on China’s banking system to supplement capital internally. Official Chinese data till the end of June showed that the net interest margin of Chinese commercial banks was around 1.41%. The key profitability indicator has been narrowing since 2019 due to interest rate cuts resulting from economic slowdown and weak loan demand.
Compared to global systemically important banks like JPMorgan Chase, HSBC, and Citigroup, Chinese major state-owned banks have a relatively stronger asset base on paper but weaker capital strength. The Tier 1 common equity ratios of leading Western banks typically exceed 15%, whereas all major Chinese banks have lower ratios, some even around 10%.
In an environment affected by economic slowdown, policy rate cuts, weak loan demand, and repricing of existing loans, Chinese banks are facing pressure on capital supplementation through retained earnings.
Bloomberg noted that this round of capital injection aims to ease pressure on the profit margins of large state-owned banks. In the first half of this year, the profit growth of China’s five major state-owned banks ranged from 3% to 5%.
Senior fellow at the Carnegie Endowment for International Peace, Michael Pettis, raised questions about the capital injection plan. Pettis pointed out on social media that while increasing capital can enhance a bank’s ability to continue lending from a regulatory and accounting standpoint, he questioned whether simply raising the book capital ratio could reduce systemic risk, especially if the entire banking system faces high leverage and asset risks.
Using the example of “banks re-capitalizing each other,” Pettis highlighted that if risks are concentrated in a few overly expanded banks, other banks providing capital could enhance safety. However, if the entire system is overextended, additional capital may not increase the overall system’s loss-absorption capacity.
Drawing on the 1995 Mexican banking crisis, Pettis emphasized that during Mexico’s banking privatization from 1991 to 1992, even though banks appeared well-capitalized on paper, much of that capital stemmed from financing, shareholding, or indirect support from other banks. When the crisis hit, it wasn’t just a couple of banks facing issues but the entire banking sector under pressure, rendering such mutual recapitalization actions ineffective as each bank’s losses ultimately became the system’s losses. Pettis had advised the Mexican government on banking privatization.
He believes that the “new” capital injection announced by Beijing is merely confirming what was already known, indicating that the Ministry of Finance ultimately stands as a backstop for the banking system.
“It doesn’t relieve the risk situation in any way other than accounting changes,” cautioned the financial expert. “If systemic problems arise, we will quickly learn this lesson again.”
Chairman of Taiwan’s Wealth Magazine Media, Xie Jinhe, expressed that the bad debt levels within the Chinese mainland banking system are concerning. Therefore, despite the massive capital injection, the anticipated effect might not be significant.
In an interview with Epoch Times, Xie said that based on bank balance sheet data, mainland banks do not need an immediate capital increase. The Ministry of Finance’s move is intended to “buy time with money” to give the financial system breathing space while waiting for the gradual recovery of the economy and real estate market.
He likened the situation to cancer treatment, warning that if only blood transfusions and capital infusions continue without addressing the “lesions” on the asset side, the injected funds may be continuously depleted.
Stock prices of 42 Chinese banks, including Industrial and Commercial Bank of China, China Construction Bank, China Life, and Minsheng Bank, all experienced a comprehensive decline on Monday.
According to public data, none of these 42 listed banks in the A-share market in China had a Price-to-Book Ratio exceeding one. Minsheng Bank had the lowest ratio, at around 0.25 times as of early September. There have been rumors linking Minsheng Bank closely with the Evergrande Group and its chairman, Xu Jiayin.
Xie Jinhe posted on Facebook on Monday, noting that “recently, Xu Jiayin of the Evergrande Group was sentenced to life imprisonment, but no one dares to face the 2 trillion yuan debt he moved out of the bank. How many non-performing loans have banks actually swallowed? No one dares to uncover it, which has kept bank stocks under long-term pressure.”
He stated that the Chinese authorities are intensifying policy supervision, demanding companies to pay taxes and fines, and reportedly working internally to transfer money overseas, causing funds to flow in the opposite direction.
“If these trends do not change, the next decade in China will be tougher than the previous one!” he concluded.