Industry "Reducing Volume and Improving Quality," Small and Medium-Sized Banks "Replenishing Capital" Accelerates

Question: How can the AI-driven policy of reducing quantity and improving quality accelerate the capital replenishment of small and medium-sized banks?

Reporter Lao Yingying

Since the beginning of 2026, domestic small and medium-sized banks have launched a “capital replenishment” surge. According to incomplete statistics, over 80 small and medium-sized banks have initiated capital supplementation this year due to pressure on capital adequacy ratios. This round of capital replenishment involves diverse tools, including targeted issuance, convertible bonds converting to shares, and perpetual bonds, all working simultaneously.

Economic Observer learned from interviews that this “capital replenishment” wave is driven by capital consumption caused by narrowing net interest margins and intensified market competition, as well as the push for “reducing quantity and improving quality” and mergers and acquisitions among small financial institutions. Under regulatory guidance, market-based funds, local government special bonds, insurance funds, and others are becoming key participants in establishing a long-term mechanism for capital replenishment for small banks.

Small and Medium Banks Launch “Capital Replenishment”

Among this wave of bank “capital replenishment,” some regional large city commercial banks are also active. For example, on March 7, Chengdu Bank announced that it received approval from the Sichuan Financial Regulatory Bureau to increase its registered capital from 3.736 billion yuan to 4.238 billion yuan. This change was triggered by the early redemption and delisting of the bank’s convertible bonds, which led to a large-scale conversion to shares, increasing the total share capital. Chengdu Bank became the first bank in 2026 to expand its capital through convertible bond conversion.

As of the third quarter of 2025, Chengdu Bank’s core Tier 1 capital adequacy ratio, Tier 1 capital adequacy ratio, and total capital adequacy ratio were 8.77%, 10.52%, and 14.39%, respectively. According to the China Banking and Insurance Regulatory Commission’s main regulatory indicators for Q4 2025, the core Tier 1 capital adequacy ratio, Tier 1 capital adequacy ratio, and total capital adequacy ratio of commercial banks were 10.92%, 12.37%, and 15.46%, respectively. Chengdu Bank’s capital adequacy ratios are all below industry averages.

Some banks have seen declines in capital adequacy ratios compared to 2024. For example, Hubei Bank, according to its official website, as of September 2025, had a core Tier 1 capital adequacy ratio of 7.74%, Tier 1 capital adequacy ratio of 9.25%, and total capital adequacy ratio of 11.41%, all lower than in 2024. In early February, Hubei Bank announced the issuance of 1.8 billion shares, raising 7.614 billion yuan, which increased its registered capital to 9.411 billion yuan. The funds raised will be used entirely to replenish the bank’s core Tier 1 capital, improve capital adequacy, and enhance its risk resistance.

Guangzhou Bank is similar. Its previous official notices about capital increase projects indicated plans to further supplement capital through capital expansion. As needed, Guangzhou Bank and Guangzhou Financial Holdings Group Co., Ltd. procured legal, asset appraisal, financial advisory, and accounting services for this purpose. As of the third quarter of 2025, Guangzhou Bank’s core Tier 1 capital adequacy ratio, Tier 1 capital adequacy ratio, and total capital adequacy ratio were 7.73%, 9.20%, and 12.65%, respectively, all lower than at the end of 2024.

According to the China Banking and Insurance Regulatory Commission, as of the end of Q4 2025, the average capital adequacy ratios of city commercial banks and rural commercial banks were 12.39% and 13.18%, respectively, both below the banking industry average of 15.46%. Some banks’ core Tier 1 capital adequacy ratios are approaching regulatory red lines, making capital supplementation an inevitable choice.

Additionally, the reporter noted that compared to previous years, this round of small and medium-sized banks’ capital supplementation tools are more diverse, including targeted issuance, convertible bonds converting to shares, and perpetual bonds. Besides Chengdu Bank’s use of convertible bonds, on March 9, the Guangdong Regulatory Bureau of the China Banking and Insurance Regulatory Commission approved Dongguan Rural Commercial Bank to issue up to 6 billion yuan of capital instruments, including secondary capital bonds and perpetual bonds.

In response, Lou Feipeng, a researcher at China Postal Savings Bank, told the Economic Observer that perpetual bonds are gradually replacing high-cost preferred shares, becoming the mainstream choice for banks to supplement other Tier 1 capital, significantly reducing financing costs. Moreover, the intensive participation of regional city commercial banks and rural commercial banks in perpetual bond issuance has broken the past dominance of large banks.

Mergers, Acquisitions, and Capital Supplementation

Lou Feipeng also stated that since the beginning of 2026, the frequent capital increases among small and medium-sized banks mainly reflect regulatory requirements for these banks to return to their core functions and focus on main businesses, which requires sufficient capital support. Meanwhile, net interest margins for commercial banks have fallen to a historic low of 1.42%, and small and medium-sized banks need to enhance risk resilience through capital replenishment. Additionally, large banks are expanding into county markets, internet platforms are competing for long-tail customers, and small banks face significant capital pressure to seize market share and serve clients.

Furthermore, the recent push for capital replenishment and risk resistance among small and medium-sized banks may also be related to the pressures faced during the recent years of promoting mergers and acquisitions of village and township banks.

In 2025, the Central Economic Work Conference proposed to “deepen the reduction and quality improvement of small and medium financial institutions,” setting clear tasks for 2026’s economic and financial work. On December 3, 2025, Wang Jiang, deputy director of the Office of the Central Financial Commission, wrote in the People’s Daily that efforts should be made to “steadily and orderly promote mergers and acquisitions, reduction, and quality improvement of small and medium financial institutions, and develop characteristic operations rooted in local areas.”

In response, Dong Ximiao, chief economist at Zhaolian, told the Economic Observer that “reduction” involves mergers and acquisitions to reduce high-risk institutions and optimize structure; “quality improvement” aims to make banks stronger. Capital supplementation is a crucial step to achieve “quality improvement,” enabling banks to shed historical burdens and better serve the real economy.

On January 14 and 26, the Baoji Regulatory Bureau of the China Banking and Insurance Regulatory Commission approved the acquisitions of Shaanxi Taibai Changyin Village Bank and Shaanxi Long County Changyin Village Bank by Chang’an Bank, respectively, and authorized the establishment of branches in Taibai County and Long County. Concurrently, Shaanxi Guotou A (000563.SZ) disclosed plans for capital increase and expansion for Chang’an Bank in January. Additionally, Chengdu Bank, which expanded capital through convertible bonds, completed the acquisition of Sichuan Mingshan Jincheng Village Bank in 2025.

Dong Ximiao believes that the pressures and challenges from mergers and acquisitions are closely linked to the urgent need for capital replenishment. Post-merger, the new bank must absorb all assets, liabilities, and operations of the acquired bank, increasing risk exposure and demanding higher overall risk resilience. Adequate capital acts as a buffer to absorb potential losses and resist risks.

He also emphasized that for institutions with poor asset quality and high risks, thorough resolution through mergers and acquisitions may be more fundamental than simple capital injection. This explains why “mergers and acquisitions” and “capital replenishment” are currently occurring simultaneously on a large scale—they are both essential parts of the broader reform and risk mitigation strategy for small and medium-sized banks.

Building a Long-term Capital Replenishment Mechanism

Capital replenishment only addresses the immediate capital constraints of small and medium-sized banks. Without sustainable endogenous growth, they will continue to face capital consumption pressures. During this year’s National Two Sessions, many suggestions were made on how to establish a long-term mechanism for capital replenishment.

For example, Liu Ya, Party Secretary and President of China Export-Import Bank’s Beijing Branch, believes that some city commercial banks and rural commercial banks are nearing regulatory red lines in core Tier 1 capital adequacy ratios. Allowing local governments to issue special bonds to supplement small banks’ capital is significant for alleviating capital shortages and promoting steady development of small and medium-sized banks, which benefits local financial stability.

Lou Feipeng suggested several possible paths for local governments issuing special bonds to participate in bank capital supplementation: indirect equity participation via provincial finance and financial holding platforms; regular issuance of special bonds to optimize local bank equity structures; mobilizing quality state-owned and private enterprises to purchase special bonds and become shareholders; and government as a shareholder to strengthen financial institution management.

Additionally, Li Yunze, Secretary and Director of the China Banking and Insurance Regulatory Commission, pointed out during the Two Sessions that besides central government issuance of special national bonds, market-based approaches could also be used to mobilize more social funds, such as insurance funds, to participate in capital replenishment.

In response, Zhou Jin, partner at Tianshi International Financial Consulting, told the Economic Observer that insurance funds participate mainly through debt instruments like capital replenishment bonds, perpetual bonds, and preferred shares, as well as equity instruments such as strategic placements in IPOs and secondary market share increases. Innovative products like equity investment funds or special asset management plans can also be explored. Regardless of the method, the patient capital characteristic of insurance funds can better solidify banks’ capital base, support long-term development, and promote cooperation between banks and insurance institutions in channels and clients.