China's banks require massive capital infusion to stabilize the economy

Analysts emphasize that China's largest banks need to be recapitalized quickly to boost the economy through increased lending and manage the burdens of declining asset quality. The profitability of Chinese banks, already suffering from the economic downturn and the real estate crisis, will be further pressured by another reduction in mortgage interest rates. Although the largest banks might lower their deposit rates to protect their margins, experts call for a fresh capital injection to offset the increasing asset quality issues and potentially rescue smaller banks. In China, large state-owned banks are often utilized to support struggling small and medium-sized financial institutions, which suffer from low capital buffers, poor asset quality, and limited fund-raising capabilities. S&P Global Ratings estimates that China's four largest banks, including the Agricultural Bank of China and the Bank of China, required 738 billion yuan ($105 billion) in additional TLAC capital by the end of June. Bloomberg News reported that China is considering investing up to 1 trillion yuan ($142.39 billion) in its largest state-owned banks to enhance their capacities to support the faltering economy. This funding is expected to be primarily facilitated through the issuance of special government bonds, marking the first recapitalization of Chinese banks by authorities since the global financial crisis. Xiaoxi Zhang, a financial analyst at Gavekal Dragonomics, stated that the extent of the capital infusion depends on the regulatory authorities' goals—whether to avert systemic financial risks or to address the bad loans accumulated over recent years. Despite these efforts, the largest Chinese lenders continue to struggle with falling net interest margins (NIM), shrinking profits, and rising bad loans amid a slowing growth and a persistent real estate crisis in the world's second-largest economy. Four of China's five biggest banks reported lower profits in the second quarter after they reduced lending conditions under government pressure to stimulate the exceptionally weak credit demand from households and businesses.