Changpeng Wan
The State of Non-Performing Loans in Chinese Banks
China’s banking sector continues to grapple with rising non-performing loans, particularly concentrated in two critical areas: real estate development and personal lending. Recent financial disclosures from 42 listed banks reveal that while overall non-performing loan ratios showed improvement, specific sectors demonstrate concerning vulnerability. The real estate sector remains the primary source of new non-performing loans, though the rate of increase has begun to moderate according to bank executives.
Bank of China Vice President Wu Jian (武剑) noted during earnings presentations that while real estate remains the largest contributor to new non-performing loans, the actual volume of new bad debts has shown a declining trend year-over-year. However, personal loan asset quality continues to face pressure in the short term, creating a dual challenge for financial institutions.
The banking sector’s response has been increasingly proactive, with major state-owned commercial banks establishing dedicated collection teams at headquarters level to improve recovery rates from non-performing assets. This strategic shift represents a significant operational change as banks seek to extract value from distressed assets rather than simply writing them off.
Key Findings from 2025 Interim Reports
The comprehensive review of banking sector performance reveals several critical patterns. Seven banks, including Guiyang Bank and China Minsheng Bank, reported slight increases in their overall non-performing loan ratios. More significantly, certain city commercial banks and joint-stock banks showed substantial deterioration in their real estate loan portfolios.
The data indicates a sector-wide trend of carefully managed risk exposure, with most institutions maintaining stable overall asset quality despite specific sectoral challenges. Banking regulators have been monitoring these developments closely, emphasizing the importance of maintaining financial system stability while supporting economic growth objectives.
Real Estate Sector Loan Quality Deterioration
The real estate sector continues to present significant challenges for Chinese banks, with several institutions reporting substantial increases in non-performing loans tied to property development. Qingdao Rural Commercial Bank demonstrated the most dramatic deterioration, with its real estate non-performing loan ratio skyrocketing to 21.32% by mid-2025, representing an increase of 14.15 percentage points from year-end 2024.
This alarming increase translated to approximately 12 billion yuan in additional non-performing loans, bringing the bank’s total real estate bad debts to 20.95 billion yuan. The bank attributed this spike to risk exposure from specific loans currently in the disposal process, characterizing the development as normal market fluctuation. Simultaneously, the bank significantly reduced its real estate loan portfolio by approximately 2.1 billion yuan to 98.25 billion yuan.
Institutional Variations in Real Estate Exposure
Different types of financial institutions showed varying levels of vulnerability to real estate sector risks. Among state-owned commercial banks, Bank of China maintained the largest exposure to real estate with 1.02 trillion yuan in domestic real estate loans, representing an increase of 48.59 billion yuan during the first half of 2025. The bank’s real estate non-performing loan ratio reached 5.38%, the highest among major state-owned banks.
Industrial and Commercial Bank of China followed closely with a real estate non-performing loan ratio of 5.37%, up 0.38 percentage points from end-2024. Other institutions reporting high real estate non-performing loan ratios included Zhengzhou Bank (9.75%), Chongqing Bank (7.19%), Hangzhou Bank (6.44%), Agricultural Bank of China (5.35%), and China Merchants Bank (4.74%).
Several banks reported significant increases in their real estate non-performing loan ratios, including Jiangsu Bank, Shanghai Bank, Chongqing Bank, and SPD Bank. Jiangsu Bank’s real estate non-performing loan ratio reached 3.95%, far exceeding other industry segments and representing an increase of 1.75 percentage points from year-end 2024. The bank attributed this deterioration to both portfolio reduction and overall market conditions.
Market Factors Driving Real Estate NPL Increases
Banking industry experts identify several interconnected factors driving the increase in real estate non-performing loans. The fundamental issue remains the overall market downturn, with property sales declining significantly across many regions. This has created cash flow challenges for developers, reducing their ability to service debt obligations.
Industry analysts suggest that commercial banks will likely shift attention toward supporting key project delivery initiatives and monitoring the transition to new real estate development models. The focus on completing pre-sold projects has become particularly important for maintaining social stability and protecting individual homebuyers.
The concentration of non-performing loans in real estate reflects broader economic transitions as China moves away from property-driven growth models. Banks are increasingly cautious about new lending to the sector while managing existing exposure through various risk mitigation strategies.
Personal Loan Sector Vulnerabilities
The personal lending segment has emerged as another area of concern for Chinese banks, with multiple product categories showing deterioration in asset quality. Consumer loans, credit cards, business loans, and particularly mortgage loans all demonstrated increasing non-performing loan ratios across numerous institutions.
The six largest state-owned commercial banks, which dominate China’s personal housing loan market, all reported increases in their mortgage non-performing ratios. These institutions collectively held 25.73 trillion yuan in outstanding personal housing loans as of mid-2025, representing approximately 75% of the total market among 42 listed banks.
Despite this dominant market position, the big six banks saw their combined mortgage portfolio shrink by 107.8 billion yuan during the first half of 2025, continuing a three-year trend of contraction. This reduction reflects both accelerated repayment patterns and reduced new borrowing, indicating changing consumer behavior toward housing debt.
Major Bank Mortgage Portfolio Performance
China Construction Bank maintained the largest personal housing loan portfolio at 6.15 trillion yuan, though this represented a reduction of 42.36 billion yuan from year-end 2024. Industrial and Commercial Bank of China followed with 6.05 trillion yuan in mortgage loans, down 36.6 billion yuan. Agricultural Bank of China reported the largest reduction at 49.2 billion yuan, bringing its portfolio to 4.94 trillion yuan.
Not all major banks reduced their mortgage exposure. Bank of China, Postal Savings Bank of China, and Bank of Communications all reported slight increases in their personal housing loan balances. Postal Savings Bank showed the most significant growth, adding 21.316 billion yuan to reach over 2.4 trillion yuan in outstanding mortgages.
Joint-stock commercial banks demonstrated more aggressive growth in mortgage lending, with nine listed institutions collectively increasing their housing loan balance by 155.4 billion yuan. China Merchants Bank and CITIC Bank led this expansion, adding 20.929 billion yuan and 38.436 billion yuan respectively to their mortgage portfolios.
Factors Driving Personal Loan Deterioration
Several factors contribute to the deteriorating quality of personal loans, particularly mortgages. Slowing income growth has directly impacted borrowers’ ability to service debt obligations, while property market corrections have reduced the value of collateral supporting these loans.
The psychological impact of falling property prices has also influenced borrower behavior, with some opting to default strategically when their mortgage balance exceeds current property values. Additionally, previous aggressive expansion in retail lending may have led to relaxed underwriting standards at some institutions, contributing to current asset quality issues.
Regional commercial banks in higher-tier cities, including Beijing Bank, Jiangsu Bank, Shanghai Bank, Hangzhou Bank, and Nanjing Bank, generally reported better performance in their personal housing loan businesses, with many achieving positive growth despite challenging market conditions.
Banking Sector Response and Risk Management Strategies
Chinese banks are implementing comprehensive strategies to address rising non-performing loans across both corporate and personal lending segments. During mid-year earnings presentations, multiple bank executives emphasized strengthened risk management and more conservative lending practices.
Beijing Bank President Dai Wei (戴炜) highlighted enhanced risk management capabilities as a priority for 2025, including increased provision coverage and exhaustive efforts to dispose of existing non-performing assets. The bank has implemented stricter controls on new non-performing loan formation and strengthened accountability measures for credit losses.
Industrial and Commercial Bank of China Vice President Wang Jingwu (王景武) emphasized strengthened management of personal loan products at the origination stage, with comprehensive and dynamic optimization of product eligibility, rules, and management requirements. The bank is implementing full-process management of substantive risks in personal lending.
Differentiated Approaches to Real Estate Risk
Banks are adopting varied approaches to managing real estate exposure based on their specific risk profiles and business strategies. China Construction Bank Vice President Ji Zhihong (纪志宏) outlined plans to extend housing financial service chains and create comprehensive housing finance ecosystems around customer needs.
Agricultural Bank of China Vice President Lin Li (林立) reported that the bank’s real estate business risks have basically stabilized, with progress in resolving local debt risks. The bank is promoting transformation of urban corporate credit business, focusing on regional coordinated development, urban energy transformation, quality improvement, and green transition.
Agricultural Bank of China is actively supporting urban renewal actions, including demolition and reconstruction projects, renovation and improvement initiatives, and affordable housing projects. The bank continues to support projects listed under the urban real estate financing coordination mechanism.
Credit Structure Optimization and Risk Monitoring
Bank of Communications Vice President Gu Bin (顾斌) emphasized continuous optimization of credit structure with increased support for key sectors. The bank is enhancing risk monitoring and management, evaluating existing business risks, and revising credit policies accordingly.
In response to new real estate development models, Bank of Communications is strengthening research on market operations and developer trends, coordinating risk prevention across regional real estate project financing plans. This comprehensive approach reflects the banking sector’s recognition of the need for sophisticated, differentiated risk management in a changing economic environment.
Industrial Bank Chief Risk Officer赖富荣) reported that newly generated non-performing mortgages have begun to decline. The bank strictly adheres to the principle of good borrowers and good properties, maintaining stringent standards for regional, project, and customer eligibility to ensure stable growth in mortgage business.
Future Outlook and Strategic Implications
The evolving pattern of non-performing loans in Chinese banks reflects broader economic transitions and sectoral rebalancing. While challenges persist in real estate and personal lending, banking institutions demonstrate increased sophistication in risk identification and management.
The concentration of non-performing loans in specific sectors suggests the need for continued vigilance and potentially targeted policy support. Banking regulators maintain focus on financial system stability while allowing market mechanisms to facilitate necessary adjustments in credit allocation.
The strategic shift toward specialized collection teams at major banks represents an important operational innovation, potentially improving recovery rates from non-performing assets. This approach acknowledges that non-performing loans require active management rather than passive write-offs.
Sectoral Transformation and New Opportunities
The real estate sector’s transition toward new development models creates both challenges and opportunities for banks. Institutions that successfully navigate this transition while maintaining asset quality will likely emerge stronger and more resilient.
Personal lending transformation requires balancing risk management with support for legitimate consumer needs. Banks that develop sophisticated credit assessment capabilities while maintaining appropriate underwriting standards will be better positioned to serve retail customers without compromising asset quality.
The ongoing evolution of China’s financial system continues to present complex risk management challenges. However, the banking sector’s demonstrated ability to adapt to changing circumstances provides grounds for cautious optimism about long-term financial stability.
As Chinese banks continue to address non-performing loan challenges, their experiences offer valuable lessons for financial institutions globally navigating similar economic transitions. The focus on comprehensive risk management, operational innovation, and strategic adaptation positions China’s banking sector for continued development amid evolving market conditions.
For those tracking China’s financial sector evolution, monitoring non-performing loan trends provides crucial insights into economic health and institutional resilience. The coming months will likely see continued emphasis on risk control while supporting strategic economic priorities through careful credit allocation.
