Capital injection backs financial giants

China is moving to put a stronger fiscal backstop under its State-owned financial system, with the Ministry of Finance planning to issue 300 billion yuan ($44.7 billion) in special treasury bonds to replenish the Common Equity Tier 1 capital of eight major financial institutions.

The move, which comes despite the institutions' current sound capital and asset-quality indicators, signals a pre-emptive effort to strengthen banks' capacity to absorb risks and sustain lending to the real economy, while underscoring Beijing's growing use of fiscal policy to reinforce financial stability and support its broader ambition of building China into a financial powerhouse.

According to capital increase announcements released in September by the eight financial institutions, including the Industrial and Commercial Bank of China, Agricultural Bank of China, the Export-Import Bank of China, and China Export & Credit Insurance Corporation, the total planned capital increase amounts to 360 billion yuan, of which the Ministry of Finance intends to subscribe for up to 300 billion yuan in total.

The ministry said the capital injections would strengthen the institutions' ability to operate prudently, withstand risks and serve the real economy, while supporting their long-term, high-quality development. For the listed financial institutions among them, stronger capital positions could also help create greater value for shareholders and generate more stable long-term returns.

The eight financial institutions are currently operating on a sound footing, with stable asset quality and major regulatory indicators within safe and healthy ranges, according to the ministry.

Experts said the capital injections do not reflect a funding shortfall at the institutions, but rather represent a pre-emptive effort to reinforce the capital base of China's State-owned financial system. The move reflects closer coordination between fiscal and financial policies.

ICBC illustrates why additional capital is becoming increasingly important for China's major banks.

At the end of June, ICBC's CET1 capital adequacy ratio stood at 13.21 percent, comfortably meeting regulatory requirements. Its nonperforming loans ratio was 1.29 percent, down 0.02 of a percentage point from the end of last year, while its allowance to nonperforming loans rose 3.98 percentage points to 217.58 percent.

But deeper interest-rate liberalization and narrowing net interest margins have slowed the bank's ability to build capital through retained earnings. Meanwhile, after ICBC moved from Bucket 2 to Bucket 3 in the Financial Stability Board's 2025 list of global systemically important banks, it faces a higher additional capital buffer requirement.

On Sept 6, ICBC announced that it planned to raise up to 100 billion yuan through a private A-share placement to the Ministry of Finance, China National Tobacco Corporation and related subsidiaries to replenish its CET1 capital.

The move would strengthen ICBC's capital buffer, optimize its capital structure and provide a stronger foundation for managing potential risks and sustaining long-term growth.

Banks' lending capacity is constrained by capital adequacy requirements. Increasing CET1 capital allows banks to expand credit within regulatory limits, providing additional financing to businesses and households. The same principle applies to insurers. A stronger capital base enables insurers to improve solvency and expand underwriting capacity.

Dong Ximiao, chief economist at Merchants Union Consumer Finance and executive director of the Shanghai Institution for Finance and Development, said banks' ability to generate capital internally needs to improve as interest rates continue to fall and net interest margins come under pressure. At the same time, insurers are facing greater capital requirements as they expand services related to retirement, healthcare and green investment — areas that are priorities under China's national development strategies.

The latest capital injections will strengthen banks' lending capacity and insurers' underwriting capacity, Dong said.

"The impact of additional CET1 capital could be amplified through a multiplier effect," he said. "For banks, 300 billion yuan of additional capital could support more than 4 trillion yuan of additional lending, increasing financing for areas such as technological innovation, consumption and the green economy."

For insurers, the additional capital could support broader insurance coverage and greater participation in long-term asset allocation. The measure could also help address risks in areas such as property and local government debt, while providing financial institutions with a stronger capital cushion to maintain prudent operations and increase support for the real economy, he said.

Lou Feipeng, a researcher at Postal Savings Bank of China, described China's large State-owned commercial banks as the leading institutions in the country's banking sector, given their large balance sheets, extensive branch networks and broad customer bases.

Lou said the banks are also internationally competitive in areas including technological innovation and risk-adjusted returns, and expected them to make effective use of the capital replenishment measures to support their own development and provide high-quality financial services to the broader economy.

"Additional bank capital would strengthen their ability to absorb losses, increasing the safety margin for household deposits," said Lou. "It could also improve financing conditions for the real economy, including mortgages, entrepreneurial financing and business loans."

For insurers, stronger capital could enhance the security of policyholder obligations and support the development of long-term capital markets, indirectly helping pension funds maintain stable, or potentially higher, long-term investment returns, he said.

The latest move follows a 500 billion yuan special treasury bond issuance in 2025, when the Ministry of Finance provided capital support to Bank of China, China Construction Bank, Bank of Communications and Postal Savings Bank of China.

The CET1 capital adequacy ratios of those four banks increased by roughly 0.5 to 1.4 percentage points following the previous round of capital replenishment, significantly strengthening their ability to operate prudently, extend credit and withstand risks.

The latest injection signals continued government support for central financial institutions as key providers of financing to the real economy and as an anchor for financial stability.

The measures are expected to lift capital adequacy ratios at the affected banks. For Agricultural Bank of China, for example, assuming a total capital rise of 160 billion yuan, excluding issuance costs, and no change in risk-weighted assets before and after the offering, the transaction would raise its CET1 capital adequacy ratio from 10.8 percent as of June 30 to 11.41 percent.

Compared with the previous round of capital injections, the latest round not only involves capital injections into two large State-owned commercial banks, but also includes two policy-oriented financial institutions and four State-owned commercial insurance companies.

The broader coverage reflects the different roles played by various types of financial institutions and is intended to help them provide financial services better aligned with the needs of China's socioeconomic development.

Luo Zhiheng, chief economist at Yuekai Securities, said simultaneous capital replenishment across different types of financial institutions demonstrates systematic fiscal support for China's financial system. It will help lay the groundwork for higher-quality financial development and Beijing's efforts to accelerate the construction of a financial powerhouse during the 15th Five-Year Plan (2026-30).

Experts said strengthening capital buffers is also necessary to improve the financial system's ability to withstand shocks. Uncertainty in the global economy has increased, while risks facing China's financial sector remain complex. Increasing CET1 capital at central financial institutions will enhance their ability to absorb shocks and reinforce the foundations for long-term growth. In turn, this should improve the resilience of China's financial system and support financial stability and security.

"The cross-cycle capital replenishment program would significantly strengthen financial institutions' capacity to withstand domestic and external shocks," said economist Dong. "It would also send a clear signal to domestic and international markets that China's financial system has a solid capital foundation and sufficient capacity for future growth, helping stabilize market expectations and bolster investor confidence."

jiangxueqing@chinadaily.com.cn