Small and Medium-Sized Banks' Capital "Urgently Needs Replenishment," Representatives and Committee Members Propose Special-Purpose Bonds with "Self-Review and Self-Issuance"

During this year’s National People’s Congress and Chinese People’s Political Consultative Conference, the issue of capital replenishment for small and medium-sized banks became a hot topic.

The government work report clearly states the need to increase capital replenishment through multiple channels and to prudently handle non-performing assets of financial institutions; it also proposes issuing 300 billion yuan in special national bonds to support state-owned large commercial banks in capital augmentation.

Compared to large state-owned banks, small and medium-sized banks currently face significant pressure whether using internal or external methods to supplement capital, making capital replenishment particularly difficult.

In response, during the two sessions, many delegates and committee members suggested normalizing the issuance of special bonds at the provincial level, using a “self-review and self-issuance” approach to support capital replenishment for small and medium-sized banks, and establishing a multi-party coordinated long-term mechanism to ensure that capital is genuinely used to serve the real economy.

Urgent Capital Shortage for Small and Medium Banks

Capital adequacy reflects the operational strength of small and medium-sized banks and is crucial for their stable development, loss absorption, and risk resistance. By 2025, large state-owned banks will undergo a new round of national capital injections through the issuance of special national bonds. Data from the Financial Regulatory Authority shows that at the end of Q4 2025, the capital adequacy ratios for large commercial banks, joint-stock banks, city commercial banks, and rural commercial banks were 18.16%, 13.58%, 12.39%, and 13.18%, respectively.

Liu Ya, a deputy to the National People’s Congress and president of the Beijing branch of China Export-Import Bank, told First Financial that some city and rural commercial banks’ core Tier 1 capital adequacy ratios are nearing regulatory red lines. Small and medium-sized banks urgently need to increase capital support through the issuance of special bonds. Allowing local governments to issue special bonds to supplement the capital of small and medium-sized banks is significant for alleviating capital shortages and promoting their steady development, which also helps local financial institutions grow healthily.

In July last year, Jilin Province issued 26 billion yuan in special bonds to support the development of small and medium-sized banks. The funds were transferred from Jilin Provincial Finance Department to Jilin Financial Holdings Group, which then invested in Jilin Rural Commercial Bank, helping improve its capital adequacy and risk resistance. This is a vivid example of how special bonds support reform and risk mitigation for small and medium-sized banks.

As a phased outcome of the transformation and reform of small and medium-sized banks, special bonds for these banks have been innovatively implemented since 2020, with concentrated issuance in 2023 and gradual winding down in 2024, opening new avenues for reasonable capital supplementation.

In July 2020, the State Council decided to allow local government special bonds to reasonably support the capital replenishment of small and medium-sized banks. The People’s Bank of China previously disclosed that from 2020 to 2022, an additional 550 billion yuan in local government special bonds were issued, specifically for supplementing the capital of small and medium-sized banks.

Dong Ximiao, chief economist at Zhaolian, told First Financial that currently, the capital of small and medium-sized banks is “desperately needed,” and support should be given to accelerate the establishment of a long-term mechanism for capital replenishment, broaden channels for capital support, innovate capital tools, and enhance their capacity to supplement capital, especially core Tier 1 capital.

Delegates and Committee Members Suggest “Self-Review and Self-Issuance”

To address the urgent need for capital replenishment, during this year’s two sessions, many delegates and committee members proposed normalizing the issuance of small and medium-sized bank special bonds at the provincial level to help establish a long-term capital support mechanism.

For example, Liu Ya suggested under the guidance of national financial regulatory authorities, to regularly issue small and medium-sized bank special bonds at the provincial level, assisting in building a long-term capital replenishment mechanism.

Another member of the Chinese People’s Political Consultative Conference told First Financial that promoting the regular issuance of special bonds and establishing stable external funding channels at the provincial level are recommended. After funds are injected into provincial financial holding companies, they can further optimize bank equity structures, improve governance, and strengthen financial and government collaboration to serve “agriculture, rural areas, small micro enterprises,” and other sectors.

The pilot program of “self-review and self-issuance” for special bonds provides a practical path for this need. In December 2024, the General Office of the State Council issued the “Opinions on Optimizing and Improving the Management Mechanism of Local Government Special Bonds,” introducing 17 measures to improve the management of special bonds, clarifying the list of prohibited projects, and proposing to implement “self-review and self-issuance” in 11 regions including Beijing, Shanghai, Jiangsu, and Zhejiang.

During the two sessions, a delegate from Zhejiang Province also expressed hope to promote local governments’ use of special bonds to support small and medium-sized banks’ capital. For example, pilot projects could be launched in Zhejiang, opening channels during the “self-review and self-issuance” process to supplement the capital of local financial institutions through special bonds.

“This is an acceleration and optimization of the original process for using special bonds to support small and medium-sized banks’ capital. After provincial governments review and approve projects, there is no need for further approval from national ministries; they can directly organize issuance and simultaneously file the project list,” said Dong Ximiao. Previously, special bond projects required multiple layers of review, with approval from the National Development and Reform Commission and the Ministry of Finance before issuance.

Dong Ximiao believes that “self-review and self-issuance” allows banks that urgently need capital to obtain support more quickly and flexibly, better serving local “agriculture, rural areas, small micro enterprises,” and citizens. It also transforms special bonds’ role from a temporary risk response to a long-term institutional arrangement, further establishing a sustainable mechanism for capital replenishment for small and medium-sized banks.

Regular Supervision to Prevent Risks

While replenishing capital, risk prevention remains crucial.

“After special national bonds and local government special bonds are used to support banks’ capital, a regular supervision and behavioral constraint mechanism should be established to continuously monitor banks’ operations, preventing new risks from eroding hard-won capital, and turning ‘blood transfusion’ into ‘bleeding’,” emphasized Dong Ximiao.

He suggested strengthening the regulation of fund use, insisting that special bond funds be used exclusively for their designated purposes, monitored through the Ministry of Finance’s local government debt information system, and prohibiting diversion to payroll or other fields. Additionally, shareholder behavior should be constrained, with increased oversight of major shareholders to prevent manipulation, illegal related-party transactions, and other misconduct. Asset quality monitoring should be enhanced, with routine checks on asset classification and bad asset disposal to detect risks early and intervene promptly.

In terms of information disclosure, banks should regularly disclose key data such as capital adequacy ratio, non-performing loan ratio, and ownership structure to exert market discipline. More importantly, banks must adhere to serving the real economy, especially small and medium-sized banks, which should focus on local needs and return to their core functions, ensuring that capital is genuinely used to support the real economy rather than blindly expanding.

The aforementioned CPPCC members also pointed out that building a long-term mechanism for capital replenishment requires multi-party collaboration among financial regulators, local governments, and others to ensure that capital is truly used to enhance bank stability and service capacity, and to prevent moral hazard.

(Article from First Financial)