Opinion: To Secure Its Banks, Beijing Must Fix Its Economy

As China's 14th Five-Year Plan (2021–2025) reaches its conclusion, Beijing is celebrating substantial progress in the financial sector. At a recent State Council Information Office press conference, senior officials highlighted not only the sector's vast growth but also emphasized achievements in risk management, reflecting a narrative of both expansion and caution. This event set the tone for reviewing the period’s developments and underlined that risk control has been central in China’s approach[para. 1].

The sector has witnessed remarkable quantitative growth. As of June, assets in China’s banking sector topped nearly 470 trillion yuan ($64 trillion), making it the largest in the world. The country’s stock and bond markets now rank second globally, while its foreign exchange reserves have held the top global position for 20 consecutive years. Similarly, Beijing has secured the world's largest credit market and the second-largest insurance market, establishing its stature in international finance[para. 2].

Nevertheless, perhaps the most vigorously celebrated achievement was the successful reduction of systemic financial risks. Officials from the People’s Bank of China and other key finance bodies emphasized that China had prevented systemic crises, a point highlighted both in official statements and probing questions from media—demonstrating this issue’s perceived criticality by authorities and analysts alike[para. 3].

While enjoying widespread growth and an increasing value-added share of GDP, the Chinese financial industry has faced significant risks due to shadow banking, undisclosed local government debt, and a vulnerable real-estate market. Regulators responded by prioritizing financial stability and enacting a disciplined, 16-character strategy focused on stabilization, coordination, targeted policies, and precise risk management, which enabled the authorities to address acute threats methodically[para. 4].

Presently, officials claim that the system is broadly stable, with healthy institutions and smooth-running markets. Research by foreign banks corroborates these assertions, noting a descending trend in high-risk financial assets. According to Li Yunze, chief of the National Financial Regulatory Administration, both the number and proportion of high-risk institutions have dramatically declined from previous highs, with many provinces even achieving a ‘dynamic clearing’ of high-risk small and medium-sized institutions[para. 5].

Pan Gongsheng, governor of the central bank, credited four key factors for this stability: strong centralized Communist Party leadership, a macro-prudential economic and financial approach, market-based and legal principles for risk management, and robust financial supervision (including anti-corruption efforts). These are regarded as ongoing lessons for refinement moving forward[para. 6].

Pan also urged continued efforts to balance growth with risk prevention at a macroeconomic level, warning that many financial risks originate in underlying economic structures. High-quality economic development, he argued, is essential for sustainable financial stability[para. 7].

Institutionally, China has made strong advancements by building effective mechanisms, infrastructures, and staffing to address financial risk[para. 8]. Legislative measures—such as the Financial Stability Law and amendments to the People’s Bank of China Law—have institutionalized risk monitoring and accountability, enforcing market discipline to counteract moral hazard[para. 9].

These reforms have yielded tangible results. Local government debt risks were reduced by imposing fiscal discipline, requiring use of local funds and stripping certain platforms of their public financing roles; by June, the number of such local vehicles had dropped over 60% and their financial debt had halved compared to early 2023. Tackling problematic small and medium-sized institutions relied on tailored, province-specific approaches, including mergers and market exits[para. 10].

A tougher stance on regulatory misconduct and corruption has led to a more skilled and disciplined regulatory workforce—key for future risk management[para. 11].

Despite considerable progress, officials caution that financial risk is inherently persistent and volatile. As China enters its next planning phase, maintaining vigilance—particularly regarding real estate and local government debt—remains paramount. The enduring goal is to foster high-quality development and a resilient financial system to ensure lasting stability[para. 12].