[Presentation] China Banking Monitor 2025 - Turbulence in China and Hong Kong's banks and the macro implications

China’s Banking Sector•        A nominal growth problem: China's real economic growth is on track to meet the 5% growth target this year, even with some deceleration in the second half. And yet, nominal growth has been performing worse than real growth, dropping from 10% a decade ago to around 4% in Q2 2025. This trend is challenging for the banking sector with the increase of assets rising from 281% of GDP in 2019 to 333% of GDP in H1 2025. With financial data from the banking sector, we can answer more questions about the macroeconomy and the transmission of government policies.•        Key policy transmission channel: China is walking a tightrope in cutting interest rates to support the economy and finding ways to cushion banks' profitability. Banks play a pivotal role in absorbing the fiscal deficit through buying and swapping bonds with lower yields and longer maturity. The purchases have reduced the credit spreads for LGFVs, easing part of the debt problem.•        The next five-year plan: With bigger economic challenges, Chinese banks are expected to share bigger responsibility and sacrifice their profitability for government objectives. We think banks will (i) give up their earnings to help reshuffle resources in the economy; (ii) give preferential loans to SMEs, manufacturing and tech sectors with favorable loan condition, but it may backfire in asset quality; (iii) continue to buy government bonds to fund infrastructure investment; (iv) swap government bonds with extension to resolve debt problem; and (v) support the demand in green transition.•        Lower profitability structurally: We expect net interest margins to slip from about 1.52% in 2024 to 1.49% in 2025. Asset growth had been sluggish until recently, supported by government bonds, but this support is unlikely to change the lower return on asset. Chinese banks face a sharp decline in loan interest income due to faster benchmark interest rate cuts and the repricing of existing lending. But proprietary investment income and lower funding costs have provided some buffers.•        Challenges in asset quality: Although the stressed loan ratio (special mention and non-performing loans) is estimated to decline from 3.88% in 2022 to 3.66% in 2025, the pressure on asset quality is greater than it appears due to the effort in restructuring loans. If we add back write-offs and restructured loans, the adjusted stressed loan ratio would have increased from 4.53% to 4.83%, indicating that banks are absorbing the cost of decelerating economic growth and credit risks.  Beyond restructuring, the fast loan growth to households and small and micro enterprises points to a potential worsening in asset quality, especially if the business cycle deteriorates.•        Capital adequacy supported by regulatory change, debt swap and state-led recapitalization: With the new capital regulations effective as of 1 January 2024, the risk weight requirement for a range of instruments has decreased. At the same time, the local government debt swap has helped banks lower the risk weight on assets and improve their capital ratio by 19 bps in 2024. The government has injected RMB 520 billion into state-owned commercial banks, resulting in a 23-basis-point increase in the system-wide solvency ratio. A similar level of support is expected in 2025 and 2026, but the longer-term problem remains in the lack of organic capital generation.Hong Kong’s Banking Sector•        No longer a mainland China story: With a few years of recession, geopolitical tensions, and a deep downturn in the property market, Hong Kong banks face the worst asset quality in the last decade. The overall NPL ratio (including gross special mentioned and classified loans) reached 4.1% in June 2025, higher than 3.9% during the Global Financial Crisis (GFC). It is important point to note that it is no longer a mainland China story, as the gross classified loan ratio has declined from its peak, but rather due to local factors in Hong Kong. As property constitutes half of total bank lending, it has become an indispensable part in analyzing Hong Kong’s economy and the banking sector.•        Biggest risk on commercial real estate: Forming 36% of total loans, Hong Kong’s housing market has so far stabilized on rents but not on housing prices, leading to more negative equity cases at 10% of outstanding residential mortgages in Q2 2025. The improvement in transactions after the reduction of stamp duties, the healthier structure of the mortgage market with longer maturities and lower leverage by households and more mortgage-free homeowners are the supportive factors. However, rental yield is still quite close to mortgage rate, the higher share of mobile residents, the elevated inventory level and the potential; supply in the Northern Metropolis will limit the rebound. Commercial properties accounting for 8% of total Hong Kong banks loans, can bring more challenges. Work-from-home arrangements, hot desking, and slower job growth have reduced office demand. New completions are lifting vacancy, adding pressure on rents and prices.Green Finance•        Green credits are increasingly significant in Chinese banks’ loan structure while green bonds also show sign of recovery with issuance almost doubled versus 2024. That said, the structure shows more concerns.•        Loan to energy transition remains subdued given renewable sector’s underperformance. Meanwhile, small banks are disbursing more green credits vis-à-vis large banks, which may add to their credit risk. Green bonds are increasingly dominated by governments, but their missing green label may imply implicit risks to the banks buying them.•        China is the largest energy transition investor globally, yet most funds come from corporates’ reinvested profits and government subsidies. As incentives roll back and profits fall, external financing, particularly from banks, will be needed, which is also true for M&As to reduce excess capacities under the anti-involution policies.•        That said, China’s lagging decarbonization progress means investment needs to diffuse to carbon intensive sectors even if the return of capital is low, such as steel and cement. The end of low-hanging fruit of renewable and the hard reality of emission cut mandates may create new pressures for the banking sector in China.