China’s financial de-risking is entering its second phase, with a positive financial cycle continuing

Overview

This report focuses on de-risking, deleveraging, and the long-term development cycle of China’s financial system. The core view is that most historical high-risk financial assets have been substantially cleared, and that real estate-related losses, resolution of implicit local government debt, convergence of industrial credit risk, and household deleveraging are jointly driving lower financial-system risk. At the same time, fiscal policy and infrastructure spending can still provide downside support, while household financial assets continue to grow and gradually shift from deposits toward wealth management, funds, and equity assets, creating a positive cycle for banks, brokers, and capital markets.

Core views

The report argues that China’s financial risk control is entering a higher-quality phase: first, high-risk financial assets are expected to fall from Rmb21tn in 2025 to around Rmb15tn by the end of 2027; second, real estate-related credit losses from 2021 to 2024 were absorbed by the financial system, bond investors, shareholders, and supply chain participants; third, local government implicit debt resolution already has a clear timeline, requiring completion of stock clean-up by the end of 2028; fourth, household deleveraging may suppress consumption in the short term but is beneficial in the long run for reducing credit risk; fifth, bank NIM and income growth are stabilizing earlier than expected, and capital markets may evolve into a slow-bull cycle under the dual forces of household asset allocation shift and greater institutionalization.

Analysis framework

The report applies an integrated framework covering macro credit cycles, sector leverage, asset quality, financial asset allocation, and financial institution profitability, and separately evaluates real estate, local government financing platforms, industry, households, banks, and brokers. The analytical focus is on financial-system stock risk, speed of risk digestion, quality of credit growth, changes in asset returns, and how capital market activity affects profitability in financial sub-sectors, rather than valuation of individual companies.

Methodology notes

• Credit risk cycleHigh-risk financial asset cleanup framework

  Measures the pace of historical risk cleanup in the financial system using the scale of high-risk financial assets and their share.

  The report compares expected high-risk financial asset levels for 2017, 2025, and end-2027 to assess whether China’s financial-system risk has moved from stock clearance to a more manageable stage.

• Sector leverage analysisDeleveraging by real estate, local government, industry, and household segments

  Decomposes credit risk sources by sector to identify risks already digested and credit sub-areas that still require further adjustment.

  The report separately evaluates real estate loss digestion, LGFV debt swaps, a slowdown in industrial capital expenditure, and further deleveraging needs for household consumer and business lending.

• Financial institution profitability frameworkNIM, asset quality, fees, and capital market activity

  Uses loan yield, NIM, revenue growth, reserve coverage, and capital market turnover and financing activity to judge profit trends for banks and brokers.

  The report argues that stabilizing loan yields, shifting household asset allocation, and higher A-share market activity will ease bank earnings pressure and support ROE recovery for leading brokers.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Chinese bank stocks

  Direct beneficiaries

  Strengths

  Net interest margins are stabilizing, loan yields are stabilizing, overall asset quality is stable, reserve coverage is relatively high, and dividend yields are attractive.

  Weaknesses

  Slower credit growth and household deleveraging may limit short-term scale expansion.

  Comparison

  The report cites Industrial Bank, CITIC Bank-H, CCB-H, BOC-H, and Bank of Ningbo as representative examples of resilient or growing names in the bank segment.

  Risks

  If risks in real estate, retail lending, or local debt re-emerge, bank asset quality and earnings recovery could come under pressure.

• Chinese broker stocks

  Cyclical and structural beneficiaries

  Strengths

  Higher A-share turnover, a rebound in household equity allocation, increasing institutionalization, and stronger financing and derivatives demand support ROE recovery at leading brokers.

  Weaknesses

  Performance remains sensitive to capital market activity and regulatory pace.

  Comparison

  The report believes CICC-H and CITICS-A among leading brokers have advantages in institutional business, trading, large-cap underwriting, and integrated operations.

  Risks

  If market turnover declines, financing pace slows, or risk appetite falls, broker earnings sensitivity may weaken.

• China capital markets

  Positive-cycle conduit

  Strengths

  Household assets are shifting from deposits to funds, wealth products, and equities; A-share daily turnover has doubled year-on-year in 2026 so far; IPO financing has rebounded.

  Weaknesses

  Although risk appetite for equities has recovered, it remains below 2021 levels.

  Comparison

  The report attributes current capital-market momentum to asset-allocation migration rather than pure credit inflows, and thus views it as more sustainable.

  Risks

  Changes in regulation, earnings cycles, and household risk appetite could affect the slow-bull trajectory.

• China credit assets

  Risk convergence

  Strengths

  The share of high-risk financial assets has fallen sharply, LGFV debt resolution is progressing on schedule, and industrial capital expenditure has slowed.

  Weaknesses

  Consumer and business lending and some industrial segments still need further deleveraging.

  Comparison

  Compared with the 2017 period when high-risk assets accounted for 30.2%, risk levels in 2025 are clearly lower.

  Risks

  If macro growth, PPI, or real estate sales continue to weaken, the credit-risk digestion period may lengthen.

Key data

• High-risk financial assets2017: Rmb62tn, representing 30.2% of financial assets; 2025: Rmb21tn, representing 4.9%; expected to be about Rmb15tn and around 3% by year-end 2027Used to measure progress in clearing financial risk.
• Real estate-related loss digestionAbout Rmb7tn of dead-stock-related losses were absorbed over the past four years, with about Rmb3.4tn absorbed by the financial systemCovers digestion of real-estate-related credit risk from 2021 to 2024.
• Local government implicit debtIn 2024, implicit debt declined by Rmb3.8tn to Rmb10.5tn by year-end 2024The central government requires completion of stock implicit debt resolution by end-2028.
• Industrial sector capital expenditureOn a debt basis, 85.1% of the industrial sector had slower capital expenditure in May 2026 relative to the first half of 2024Indicates new industrial credit risk already shows signs of convergence.
• Sustainable social financing growthAbout 6%The report believes a social financing growth rate around 6% is more sustainable and supports more efficient credit allocation.
• Government net interest burdenIf current government leverage and infrastructure pace continue, it could rise from 2.09% in 2024 to 2.61% by 2030; if fiscal resources gradually shift toward consumption and welfare, around 2.54% by 2030The report views this level as manageable.
• Household financial asset allocationHousehold deposit growth slowed to 7.5% year-on-year in May 2026, while non-financial institution deposits rose 29.6% year-on-yearReflects incremental savings shifting toward wealth products, funds, and other financial products.
• Payments and consumptionTotal payment volume in Q1 2026 grew 29% year-on-year, and debit/credit card consumption grew 3.2% year-on-yearPayment recovery and RMB internationalization are seen as long-term growth drivers for China’s financial companies.

Impact & implications

From an investment standpoint, the report is constructively positive on the China financial sector. On the banking side, stabilizing NIM and loan yields, improving income growth, stable asset quality, and relatively high dividend yields help ease profit pressure. On the brokerage side, higher A-share turnover, IPO and refinancing activity, rising institutionalization, and stronger demand for derivatives and cross-border allocation may allow leading brokers to sustain double-digit ROE for a longer period. At the macro level, post-de-risking resource allocation in the financial system becomes more efficient, helping to create a positive cycle from household asset allocation and active capital markets to higher financial institution profits and real-economy financing.

Risks

• Further household deleveraging may continue to suppress consumption growth in the short term.
• Growth in consumer and business lending remains above some fundamental variables and may require further adjustment.
• If the property market fails to stabilize, it could weigh on local fiscal revenue, bank asset quality, and household balance sheets.
• Although LGFV implicit debt resolution has a timetable, execution pace and fiscal resource constraints still need close monitoring.
• If financial asset returns fail to stabilize, bank NIM and income recovery may fall short of expectations.
• The capital-market slow-bull phase depends on household allocation shifts and institutionalization; if risk appetite declines, broker earnings sensitivity may be limited.

What to watch

• Whether high-risk financial assets fall to around Rmb15tn by end-2027 as expected.
• Execution progress of LGFV implicit debt swaps and the target to resolve stock debt by end-2028.
• Property-related income, inventory, and bank real-estate-related NPL generation trends.
• Whether social financing and RMB loan growth move toward a sustainable medium-term level around 6%.
• Changes in bank net interest margins, loan yields, income growth, and non-performing loan coverage.
• Household deposit growth, non-bank deposits, fund issuance, and the share of equity allocation.
• A-share turnover, IPO and refinancing pace, and the sustainability of broker ROE recovery.
• Tightening of regulation on consumer and business lending and its impact on retail credit risk.