China’s commercial banks are facing challenges as the latest data for the third quarter of 2025 reveals a stabilization of the net interest margin at 1.42%, while the non-performing loan balance has increased to 3.5 trillion yuan, with a non-performing loan ratio of 1.52%. The industry is experiencing the dual pressure of narrowing interest margins and deteriorating asset quality, leading to the accumulation of hidden risks. Experts point out that with the narrowing profit margin and increasing pressure on risk, the Chinese banking sector may face a dilemma of “shrinking revenue and rising risk,” which could potentially trigger a systemic financial crisis.
According to recent data released by the China Banking and Insurance Regulatory Commission, by the end of the third quarter of 2025, the net interest margin of commercial banks remained stable at 1.42%, ending the previous trend of continuous narrowing. The net interest margin is a key indicator measuring the profitability of banks, calculated as the ratio of net interest income to total interest-earning assets.
However, there is a worrisome trend in asset quality indicators. By the end of the third quarter, the non-performing loan balance of commercial banks reached 3.5 trillion yuan, an increase of 883 billion yuan from the previous quarter, with a non-performing loan ratio of 1.52%, up by 0.03 percentage points. The non-performing loan ratios of city commercial banks, rural commercial banks, and private banks increased by 0.08, 0.05, and 0.08 percentage points, respectively. Concerning classified loans, which represent higher-risk loans, the proportion has risen to 2.20%, an increase of 0.03 percentage points from the previous period. The provisioning coverage ratio of commercial banks has decreased to 207.15%, down by 4.82 percentage points from the end of the first half of the year.
Chinese issues expert Wang He expressed concerns in an interview with Epoch Times, stating that the commercial banks’ net interest margin of 1.42% is close to a historical low and their operational limit, with a non-performing loan ratio reaching 1.52%. He warned, “The interest margin can no longer cover the bad debt ratio, putting all bank operations in a highly risky state.”
Wang He further explained that the financial statements of China’s six largest state-owned banks differ from the true operating conditions, indicating that their operational cash flow is drying up, already showing negative figures in the first half of this year. He suggested that the strict scrutiny of withdrawals by banks illustrates a tight cash flow situation.
Professor Sun Guoxiang from the Department of International Affairs and Business at Nanhua University in Taiwan told Epoch Times that China’s banking system is facing a triple threat: a decline in loan revenue leading to weakened profitability, marginal deterioration in asset quality with the accumulation of risks in real estate and micro-loans, and the exposure of risks in local government and small-to-medium banks, with smaller banks having high loan exposure to local platforms and real estate.
Summarizing, Sun Guoxiang stated, “The Chinese banking system is facing a double squeeze of declining revenue and rising risks, putting both capital supplementation and risk digestion capabilities to the test.”
Data cited by the First Financial revealed that in October 2025, the average weighted interest rate for new corporate loans was 3.1%, approximately 40 basis points lower than the same period last year. The average weighted interest rates for new personal housing loans remained at 3.1%, about 8 basis points lower than the previous year.
Analysis from Xingye Research suggested that the operating costs of bank loans primarily include funding costs, credit costs, and management costs. If loan interest rates fail to cover these costs, new loan issuance by banks will incur losses, eroding their capital base.
The current low loan interest rates are influenced by three main factors: a relatively faster decline in deposit costs, a continual rise in personal loan non-performing rates, and maintenance of historically low management costs.
Xingye Research’s calculations showed that by December 2024, mortgage rates had dropped to 3.09%, resulting in an inverted operating cost situation. Subsequently, the central bank intensified the regulation of mortgage rates. In September 2025, rates for personal housing loans and corporate loans were 3.06% and 3.14%, slightly higher than the corresponding operating cost line.
The differentiation trend in the banking industry continues to intensify. By the end of the third quarter, the total assets of state-owned large banks increased by 10.0% year-on-year, significantly higher than the industry average, doubling the growth rate of joint-stock banks at 4.7%; the asset share of state-owned large banks reached 43.9%, up by 1.2 percentage points from the previous year. The market share of joint-stock banks and small-to-medium banks has been steadily declining.
Based on the above data, Wang He analyzed the three core areas of banking risks and their interrelationships. He pointed out that real estate, small financial institutions, and local debt are interconnected: “A large amount of funds was invested in real estate in the past, with banks issuing substantial loans. After the real estate bubble bursts, these financial chains become very risky.”
Regarding the transmission of risks between local financing platforms and banks, Wang He stated, “Local financing platforms issue bonds that are purchased by local banks, small-to-medium banks, and state-owned banks. If the platform defaults on payments, not only will they collapse, but all the bank institutions that purchased the bonds will also be dragged down, setting off a chain reaction.”
Wang He emphasized that although the central government only acknowledges 14 trillion yuan of local hidden debt, the actual debt size is estimated to be at least 50 to 60 trillion yuan: “The remaining hundreds of trillions that the central government does not acknowledge, local governments simply cannot bear.”
Regarding the consolidation measures for small-to-medium banks, Wang He believed that mere mergers cannot address the fundamental issues. He expressed that the key to debt resolution lies in whether financial institutions can operate positively and sustainably; if small-to-medium banks lack commercial sustainability, the integration measures may not be effective.
Sun Guoxiang analyzed the chain effects of risk transmission on a structural level. He noted that the deterioration of local government finances, particularly the collapse of land income, would lower the financing platform’s debt repayment capability: “Once the platform companies default or extend debts on a large scale, the asset quality of banks will deteriorate, leading to a contraction of credit and impacting the real economy and corporate investment.” This cycle of “local finance-platform debt-bank assets-credit contraction” could easily reinforce negative effects.
Sun Guoxiang classified current risks into explicit and implicit categories. Issues such as local government hidden debt and high exposure by small-to-medium banks fall under implicit risks, which are large in scale and lacking transparency, capable of triggering market panic once exposed. On the other hand, declining bank profits and rising non-performing assets are explicit risks, already showing turning points observable from financial statements and official data.
Sun Guoxiang stated, “The overlay of these two types of risks makes it harder for banks to absorb bad debts, while local governments increasingly rely on new borrowing to repay old debts, creating a negative cycle.” He emphasized that implicit risks provide the trigger point, whereas explicit risks provide the detonation conditions, jointly determining the high financial fragility.
Wang He analyzed the triggers for systemic risk eruption. Since the 19th National Congress of the Communist Party of China in 2017 proposed preventing financial risks, the authorities have “only achieved interim victories, not eliminating financial risks,” essentially covering them up as much as possible and pushing them back.
Regarding the timing of potential risk eruption, Wang He believed that the crucial factor lies in whether there will be simultaneous outbreaks in multiple regions: “If similar situations erupt across various regions and converge at the same time, risks will spread rapidly, and the government will be unable to contain them.” He cited the withdrawal event at a bank in a Henan village in 2022 as an example, stating, “This issue did not trigger a chain reaction as the authorities quickly suppressed the underlying risks once they surfaced.”
Wang He cautioned, “If similar issues erupt in many regions simultaneously, the authorities will be overwhelmed, leading to a systemic financial crisis.”
Both experts agreed that China’s banking industry is currently in a critical phase of risk. While regulatory authorities continue to take measures to prevent risks, the accumulation of systemic risk vulnerabilities persists under the pressures of narrowing interest margins, deteriorating asset quality, and high levels of hidden debts. Experts urged for enhanced transparency in information and risk monitoring to prevent a crisis eruption.