News Desk
China’s economy is projected to grow by 4.3 per cent next year, the Organisation for Economic Co-operation and Development (OECD) said this week as it trimmed a 10th of a percentage point off its previous forecast in the light of ongoing world trade strife. “Substantial barriers to trade” coupled with “diminishing confidence and heightened policy uncertainty” were putting downward pressure on economic growth rates around the world and China this year and next, the Paris-headquartered world trade advocacy group said.
The OECD outlook said Chinese exports would be “curbed by the newly imposed tariffs”, while imports would fall as production was increasingly localised. This week’s outlook report from the 38-member OECD follows US President Donald Trump’s blast of double-digit tariff increases on imports from multiple countries this year. Many of the countries targeted are in Asia, with China singled out for the largest increases.
“The tariffs will disproportionately affect private companies, including foreign ones, as they are the major exporters,” the report said. The US absorbed 13.5 per cent of direct Chinese merchandise exports last year. Chinese consumption, the OECD added, was “being dampened by still high precautionary savings as a scarring effect of the pandemic, and the real estate correction”, albeit with support from China’s consumer durables trade-in programme this year.
The OECD kept its estimate for China’s economic growth rate this year unchanged at 4.7 per cent. Officials in Beijing are striving for economic expansion of “around 5 per cent”.
The Chinese banking sector faces mounting pressure as economic downturns continue to squeeze profitability. A Nikkei analysis of 58 commercial banks across mainland China and Hong Kong indicates that 80% have seen their net interest margins fall below the industry’s profitability threshold, with 54 reporting year-over-year declines. This sharp contraction stems from weak loan demand amid China’s protracted property slump, declining household borrowings, and sluggish corporate investment. Export and industrial production are also faltering, contributing to rising unemployment and lower consumer spending. Meanwhile, deflation exacerbates banks’ struggles, as reduced pricing power discourages lending, weakening balance sheets and deepening concerns over financial stability.
China’s property sector remains in deep distress, with property investment plunging 10.3% year-on-year in the first four months of 2025. New home prices have stagnated since May 2023, reflecting weak buyer confidence despite government stimulus efforts. Developers, burdened by mounting debt and liquidity constraints, have struggled to complete pre-sold homes, further eroding trust in the market. As a result, households have sharply reduced borrowings, exacerbating the decline in credit demand. Lending rates have fallen, squeezing banks’ profit margins. Meanwhile, new construction starts dropped 23.8%, signalling continued weakness in developer activity and reinforcing concerns over long-term financial stability.
China’s economic slowdown has been exacerbated by a sharp decline in exports and industrial production. In April 2025, industrial output grew by just 6.1% year-on-year, down from 7.7% in March, reflecting weakening global demand. Manufacturing, which accounts for a significant portion of China’s economy, saw a slowdown across major sectors, including electronics, textiles, and automotive production. Meanwhile, China’s total exports stood at $335.6 billion in December 2024, marking a decline from previous months. This slump has led to reduced earnings for manufacturers, forcing companies to cut costs through layoffs, contributing to rising unemployment rates.
The contraction in employment has had a ripple effect on consumer spending. With job losses mounting and wage growth stagnating, households have become increasingly cautious, reducing discretionary spending and delaying major purchases. This decline in consumption further weakens domestic demand, creating a vicious cycle of economic stagnation.
Deflation has compounded these challenges, with prices falling across key industries. Businesses, anticipating further price drops, have postponed investments, while consumers delay purchases in hopes of lower costs. This deflationary pressure discourages borrowing, reducing banks’ ability to generate revenue from loans. As lending activity declines, financial institutions struggle to maintain profitability, raising concerns over the long-term stability of China’s banking sector. Without significant policy intervention, the financial squeeze could deepen, prolonging economic uncertainty and limiting recovery prospects.
China’s banking sector is grappling with a mounting bad debt crisis, with non-performing loans (NPLs) reaching 1.5% of total commercial bank assets at the end of 2024. Excessive lending to struggling state-owned enterprises (SOEs) has led to inefficient credit allocation, with 16% of system credit classified as unproductive. The government has injected capital into six major state banks to mitigate risks, but concerns persist over long-term solvency. Meanwhile, personal loan delinquencies have surged 760% year-on-year in early 2025, driven by mortgage defaults and consumer credit failures. Regulatory restrictions on aggressive lending have further constrained banks’ ability to recover losses, creating a fragile financial environment. Without decisive intervention, China’s banking system faces prolonged instability, threatening broader economic recovery efforts.
China’s banking sector is facing mounting pressure as lending margins continue to shrink, raising concerns over long-term solvency. According to a BBVA Research report, return on assets (ROA) and return on equity (ROE) have hit record lows, driven by weak credit growth and declining lending rates. The property sector downturn remains a major factor, with local government financial vehicles (LGFVs) struggling under heavy debt burdens, further straining banks’ balance sheets. Additionally, the IMF’s Financial Sector Assessment Program highlights rising vulnerabilities among smaller banks, particularly those with riskier business models.
Despite government intervention, including capital injections into major state banks and regulatory reforms, the financial sector remains fragile. The TLAC rollout in 2025 has introduced new capital adequacy pressures, particularly for smaller lenders. Meanwhile, shadow banking interconnectedness has risen, as smaller banks increasingly rely on interbank funding amid declining market rates.
The broader implications of this crisis extend beyond China’s borders. With US tariffs reintroduced under Trump’s administration, external trade pressures are compounding domestic financial instability. If lending margins remain compressed, banks may require further government support, potentially leading to increased fiscal strain. The question remains: will policymakers implement aggressive stimulus measures to revive lending, or will regulatory constraints limit recovery efforts? As China navigates these financial challenges, the global economy watches closely, anticipating potential ripple effects across international markets.
China’s banking sector stands at a critical crossroads, grappling with shrinking profit margins, mounting bad debt, and deflationary pressures. As policymakers weigh stimulus measures and regulatory adjustments, the financial system faces profound uncertainties. Will targeted reforms restore stability, or will prolonged economic distress deepen systemic risks? The evolving landscape of exports, property markets, and domestic consumption will shape recovery trajectories. Explore the intricate dynamics at play and analyze the potential pathways for China’s banking sector as it faces one of its most significant profitability challenges in recent history.
Economic outlook updates as reported by wire services.
