Chinese mid-sized banks clean up risks but domestic demand stays weak

Lenders are showing a declining shadow banking exposure and better transparency.

China’s mid-sized banks have improved asset quality but will continue to face subdued domestic demand and weak household confidence, said Fitch Ratings.

“A declining shadow-banking exposure and better transparency around these activities at most Chinese mid-tier banks point to a more moderate risk appetite. This should support underlying asset quality,” it said.

Growth prospects continue to be pressured by lingering domestic challenges, with pressures most visible in the property and unsecured retail sectors, Fitch said.

These issues are concentrated mainly amongst smaller and unrated banks, while risks for mid-tier banks remain more manageable overall, however, it added.

“Some smaller banks still show weaknesses in corporate governance, while some shareholders may have limited capacity to provide support. This has also slowed the resolution of legacy risks at certain banks,” Fitch said.

Chinese banks’ loan growth is expected to remain sluggish in 2026 due to weak retail confidence, according to a separate report by Morningstar.

Banks are said to be doubling down on offshore investments as rates onshore remain low, according to Natixis Asia Research.

Another report by Natixis had warned that one-off government support like capital injections and new regulations may be masking banks’ capital weakness, as they do not solve the root cause of the problem.