Bank Reports Expose China’s Hidden Economic Truth

Hi, I'm Dong Shan. Welcome to Digging into China, where we explore China in depths to review unique perspectives. The eventful month of April has come and gone. And without a question, the most significant economic story was the full escalation of the US China trade war. Despite the official Chinese statements downplaying the impact, insisting that the tensions have no substantial effect on the economy, the reality often lies in the data that goes unnoticed. Let us examine two recent economic indicators. First, China's manufacturing PMI for April fell below the critical 50% mark, registering at just 49%. This figure is lower than any month in the previous year. Second, the new export orders intact within the PMI dropped sharply to 44.7% a level alarmingly close to what we saw during the pandemic. Clearly, the trade war's impact on exports is intensifying rapidly. Moreover, China's reported the first quarter GDP growth of 5.4% 4% which was touted as robust has been thoroughly analyzed in our prior discussions revealing significant exaggeration and evident signs of manipulation. Today we turn to a more reliable gauge of the economy bank financial reports. The six major stateowned banks in China recently released their first quarter results for 2025 and the findings are quite revealing. Collectively, these bank reported a 1.51% decline in revenue and a 2.09% drop in net profit. In essence, even stateowned banks are finding it challenging to generate earnings. Banks serve as the central conduit for the flow of funds in society. So, if their profits are shrinking, how credible is the National Bureau of Statistics claim of 5.4% 4% GDP surge in the first quarter. Which stateowned bank performed the worst in terms of profit last quarter? Surprisingly, it was the Industrial and Commercial Bank of China. Often regarded as the world's largest bank, alongside the second largest, China construction bank, ICBC, saw its revenue fall by 3.22% and its net profit decline by 3.99%. CCB's revenue dropped to 5.4% with its net profit also down by 3.99%. A pattern emerges. The larger the bank, the greater the impact it seems to face. Why is this? When the Chinese economy encounters systemic issues, banks struggle to issue loans, earn interest, and manage rising bad debt. The larger the institution, the more significant its challenges, and the harder it is to conceal them. Thus, no matter how optimistically the National Bureau of Statistics portrays the economy as a stable and improving, these bank reports starkly contradict such claims. Next, consider the net interest margin. The profit banks earn from lending. In simple terms, a higher margin indicates stronger profitability while a lower one signals difficulties in a core lending business. In the first quarter of 2025, the net interest margins of all six major stateowner banks declined, falling below the critical 1.8% threshold. The best performer postal saving bank managed only 1.71%. The lowest was Bank of Communications at just 1 point 1.23%. Even ICBC, the so-called largest bank in the world, recorded a margin of only 1.48% 48% down 29 basic points from the previous year. The steepest decline among the six. The trend is clear. The larger the bank, the greater its challenges. The biggest the state-owned banks face mounting pressures. Larger operations lead to bigger problems and diminishing returns. The era of effortless profit driven by the real estate boom is long gone. So, how can banks generate income? Now, the lending carries the risk of bad loans. Invest in government bonds could falter if the central bank intervenes and yet they must maintain an appearance of stability while struggling to compete and earn. It's a precarious position. The third metric is one of great public interest. The non-performing loan ratio. For years, China's banking system has worked tirelessly to keep this figure stable, reporting ratios of 1.2%, 1.3%, or even as low as 0.9% for some banks. But in an environment of plummeting property values, business failures, collapsing consumer spending, and the local government debt crisis, is it plausible for this number to remain unchanged? I find it hard to believe. Let's review the first quarter data for 2025 to see if there is any shift. As of the end of the quarter, the average non-performing loan ratio for the six major stateowner banks was approximately 1.28% roughly unchanged or slightly lower than the end of last year. For instance, ICBC reported 1.33%, Agricultural Bank 1.28% and Bank of China 1.25%. to 5% with the changes of just 0.01 percentage points. This appears stable, but such stability is achieved through extensive financial maneuvering, writing off bad loans, extending repayment terms, restructuring debt, reclassifying risks, or shifting bad loans into watch list categories. Ironically, while corporate loan quality appears to improve, personal loans, those taken by ordinary citizens are seeing rising bad loan ratios. For example, Bank of Communications reported that its personal loan non-performing ratio increased from 1.08% at the end of last year to 1.18% last quarter. Meanwhile, corporate loan bad debt ratios reportedly declined. This suggests that business receive pref preferential treatment such as rolling over loans to cover old debts while ordinary individuals are not afforded the same leniency. Turning to joint stock banks, some appears to maintain stable asset quality with low non-performing loan ratios, but their provisions reserves for potential bad loans have dropped significantly. This implies that the low bad loan ratios are not due to reduced risk but rather a deliberate choice to under reportport risks and release provisions to inflate profits. Shaman Bank is a striking example. In the first quarter, its non-performing loan ratio was among the lowest for joint stock banks at just 0.86% up only 0.0212 percentage point from last year. However, its provision coverage ratio failed dramatically from 392% to 314%, a drop of 78 percentage points. Is this a sign of reduced risk? Or is the bank intentionally releasing provisions to boost profits? By recognizing fewer bad loans and freeing up reserves, profits are artificially enhanced. This creates an illusion of stable asset quality while merely deferring risk through accounting tactics. The fourth matrix concerns changes in banks lending structure. Specifically, who received the loans in the first quarter? Uh banks lending more to businesses, local governments or individuals. These shifts offer insight into the true state of Chinese society. The overall trend shows that the six major stateowner banks increase the corporate lending at a much faster rate than personal lending. For example, Postal Savings Bank's corporate loans grew by 9.92%. China construction bank by 8.16% and the Agricultural Bank by 7.62%. In contrast, the personal loans growth ranged from just 1% to 2% with some banks seeing personal lending nearly stalled. This indicates that the businesses and the governmental projects are accessing funds but ordinary citizens are not borrowing. Why? A lack of confidence. Consumer confidence remains low. Housing prices continue to fall and small business owners see little hope. Borrowing money with no means to repay it is unappealing. So, people simply refrain. Corporate lending may appear robust, but it's less encouraging upon closer inspection. Many of these loans are directed to stateowned enterprises, infrastructure projects, or local government financing platforms, entities with the government backing. Banks lend to them because defaults are unlikely. But these loans often fail to stimulate the genuine economic activity. The mortgage sector is even more troubling. In the first quarter, mortgage loan growth at the six major banks slowed significantly. Banks like a China construction bank, agricultural bank, and a postal savings bank, which once thrived on mortgage lending, are now seeing minimal growth in this area. With the houses not selling and consumers unwilling to buy, banks are scaling back lending. These landing structure changes reveal a stock reality. The government is supporting infrastructure. Banks are prioritizing government projects. Businesses are awaiting direction and ordinary citizens are disengaged. Money continues to circulate, but confidence has ceased to flow. In summary, what do the first quarter financial reports of the six major stateowner banks tell us about China? They depict a nation that appears stable on the surface but is fundamentally fragile. Profits are reported but they are sustained through quiet struggles. Economic activity persists but public sentiment has grown cold. We observe declines in both bank revenue and profits indicating that the banking sector's profit engine is faltering. We see shrinking net interest margins showing that the traditional lending model is increasingly unsustainable. We note that a non-performing loan ratios appear stable but only because of sophisticated financial tactics. Finally, we see a shift in lending priorities with banks channeling more funds to government and corporate borrowers while personal loans and mortgages stagnate. Notably, personal loan bad debt is rising most rapidly. It is evident that in China, ordinary citizens are the first to be overlooked by the government. Businesses can still access credit to survive, but individuals are increasingly cut off. In a single sentence, China's economy has not collapsed, but it has cooled significantly. Risks have not yet erupted, but they are accumulating. Banks continue to lend, but the underlying figures are increasingly unreliable. The National Bureau of Statistics may tout the GDP figures, but bank financial reports grounded in real money cannot be fabricated. These reports articulate a reality that everyone senses, but a few dare to voice. China's economy is in decline. What should ordinary people do in response to these signals? First, do not blindly trust narratives of economic recovery. GDP figures and a government assurance of a rebound may be noted, but they should not be taken at face value. The truth is evident in your daily life. Has your income increased? Can you sell your home? Are consumption incentives being offered? Are job opportunities growing or shrinking? If banks are adopting a cautious stance, how can one remain optimistic? Second, manage your debt prudently. In the past, loans were taken with confidence in the future. Now, banks are avoiding personal lending, a sign they recognize the unreliability of household credit. If you carry a mortgage or consumer loans, avoid the risky financial decisions in the near term. Preserving cash flow is paramount. Promises of massive stimulus or a housing market rebound should be heard but not acted upon. Third, safeguard your cash reserves and employment. Banks are now lending to entities with government guarantees such as stateowned enterprises or policy supported high tech sectors. Ordinary individuals should no longer expect policy support. In today's China, the less you take risks, the better your chances of enduring this economic winter. Conversely, the more ambitious you are, the greater the risk of becoming a casualty of the system. This is a critical consideration. 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