MNI: China's Small Banks Hit As Old Economic Sectors Struggle

The poor performance of China’s traditional economic sectors such as property and infrastructure is putting pressure on small and medium-sized banks, prompting regulators to push for consolidations and restructuring, economists and policy advisors told MNI.

While China’s fast-growing high-tech industries are served by the bigger banks, smaller and mid-sized lenders which depend on now-stagnant sectors are struggling to cope with rising non-performing loans and weakening credit demand, advisors said, speaking after Zhongbang Bank underwent the first regulatory receivership since Baoshang Bank in 2019.

Zhongbank was established in 2017 in Hubei province, and specialised in retail lending to small businesses and households. It was the first of China’s 19 private lenders to be taken over, after it "experienced severe credit risks," according to the National Financial Regulatory Administration.

Authorities will push for consolidation and boosts to capital, and in some cases resolution, among small-to-mid-sized lenders, said Song Ke, deputy director of the China Banking Research Center at Renmin University of China. NFRA data shows those banks account for up to 30% of China’s total CNY410 trillion in banking assets.

CAPITAL NEEDS

Capital boosts provided by issuance of local government special bonds have so far been insufficient, Song said, adding that raising capital via private placements or issuance of Tier-2 or perpetual bonds is challenging. Li Keying, a senior analyst at Orient Golden Credit Rating International, noted that obtaining issuer credit ratings can be tough for some smaller lenders, whose financial disclosures have been delayed, with incomplete information on large exposure risks. (See MNI INTERVIEW: PBOC Must Stoke Inflation, Target 4% CPI)

Capital Adequacy Ratios at some banks in economically weaker regions may already approach regulatory minima, according to Elaine Xu, director of Asia-Pacific Financial Institution at Fitch Ratings. Consolidation among those institutions which survive would be insufficient to solve their problems, and their profitability and ability to provide credit is likely to remain constrained, Xu said.

Together with exposure to funding vehicles operated by the local governments which control many of the banks, lenders have to contend with property loans and unsecured retail lending, part of which have also likely gone bad, Xu said.

The biggest challenge for resolving risks at regional banks is disposing of non-performing assets, given constraints posed by low provision coverage ratios and narrowing net interest margins, according to Song. Non-performing loan ratios for credit cards and personal business loans jumped between 2024 and 2025, with unsecured retail lending accounting for more than half of NPLs transferred via bank auctions in Q1, he said.

At the end of 2026 Q1, the average non-performing loan ratio for rural commercial banks reached 2.79%, while it was 1.85% for city commercial banks and 1.51% for commercial banks, according to the NFRA.

The jump in bad credit card loans comes as consumers’ income expectations fall, said Li, though she added that the outlook was better for mortgages, due to high downpayment requirements and homeowners’ traditional reluctance to default.

PROPERTY A DRAG

Property remains the primary source of pressure on banks, sapping both repayments and the value of collateral, said Liu Ying, fellow at the Chongyang Institute for Financial Studies, who argues that the government should consider additional measures in the second half of this year, including increasing official purchases of unsold properties in order to meet the housing needs of younger Chinese and reducing mortgage rates. Authorities could also include measures such as tax relief and supporting deferred loan repayments by small and micro enterprise borrowers, Liu said. (See MNI INTERVIEW: China Property Bailout Would Take 10% Of GDP)

Smaller banks rely on internet platforms for some of their retail lending, and their risk management capabilities are limited, Liu noted, adding that retail non-performing loan rates may not yet have hit their peak.

While their retail customers struggle, smaller and medium-sized banks are failing to attract more corporate clients. Smaller companies are generally rolling over existing loans without fresh borrowing, and small banks tend to lack the underwriting qualifications, market-making capabilities, and professional expertise required to support bond or equity financing by high-quality large firms, which are reducing their reliance on bank loans, Li said.

Still, on the positive side, net interest margins should have limited room to fall further, thanks to restrictions on high-yield deposits and as the pace of policy rate cuts has slowed, according to Li.

MNI INTERVIEW: RBNZ At Neutral Midpoint By December

The Reserve Bank of New Zealand is likely to raise the Official Cash Rate from 2.5% to the 3% midpoint of its estimated neutral range by December and could continue tightening into the first half of 2027 as it removes monetary stimulus, supports the New Zealand dollar and returns inflation to target, former Assistant Governor John McDermott told MNI.

McDermott, now executive director at Motu Economic and Public Policy Research, expects the Monetary Policy Committee to deliver another 25-basis-point increase in September, followed by further hikes in October and December.

"They're now well within sight of most estimates of neutral, so another increase at the next meeting makes sense," he said, pointing to the Bank's 2.5-3.5% range of estimates. "The economy has regained some momentum and is gradually absorbing spare capacity. At the same time, higher oil prices reinforce the case for tightening."

Without further policy action, core inflation is likely to remain around 2.5%-2.8%, making it difficult for the RBNZ to return inflation sustainably to its 2% midpoint target, he argued.

The September Monetary Policy Statement will allow policymakers to reinforce that message, though the pace of tightening thereafter will depend on incoming data, particularly Q3 inflation.

JULY HIKE INEVITABLE

McDermott said last week's hike had become increasingly likely after the MPC began preparing markets earlier this year, although uncertainty over oil prices complicated the timing. "The Bank warned in February that it couldn't maintain that degree of stimulus indefinitely. The May meeting showed the committee moving closer to tightening, and by July the momentum in the economy justified acting," he said.

McDermott had predicted an initial hike at the May meeting. (See MNI INTERVIEW: Market Underpricing RBNZ Hike - Fmr Asst Gov)

While the economy still has spare capacity, it is diminishing as activity gradually strengthens, making it appropriate for the RBNZ to move policy back toward neutral, he added.

Market pricing now suggests investors expect policy to move towards the upper end of the neutral range by mid-2027, with some chance rates become modestly restrictive. "Core inflation is still running around 2.5-2.7%, which is in the upper half of the target band. In that environment, policy probably needs to be neutral or slightly restrictive. Once they moved in July, markets simply adjusted to the guidance the Bank had been providing."

COMMUNICATION EFFECTIVE

McDermott said last week's decision was difficult because of heightened uncertainty, which led several economists to expect the MPC would pause.

Three of New Zealand's five major banks had forecast no change in July, largely because falling oil prices reduced near-term inflation risks. (See MNI RBNZ WATCH: Financial Conditions Prompt OCR Hike To 2.5%)

McDermott added that the New Zealand dollar's prolonged depreciation also strengthened the case for tightening last week. "New Zealand is a small open economy, so monetary conditions reflect both interest rates and the exchange rate. The currency's weakness wasn't simply short-term noise — it had become persistent enough to influence price-setting behaviour." While the exchange rate should not dominate every policy decision, once depreciation begins feeding into inflation expectations it becomes an appropriate consideration for the central bank, he argued.

He said some forecasters had also focused heavily on the short-term oil story, which added to uncertainty. "But the Bank consistently emphasised the medium-term outlook. Given the circumstances, it communicated that message as well as it reasonably could." He welcomed the RBNZ's greater transparency, although he acknowledged markets would need time to adjust to the new framework.

McDermott said the biggest uncertainties facing the RBNZ are the outlook for global demand and oil prices. "At the same time, parts of the global economy continue to be supported by strong investment in artificial intelligence, and that could affect demand in the markets New Zealand exports to. Those are developments the Bank will need to monitor closely."

MNI INTERVIEW: Ex-Fed's Bullard Sees Several Rate Hikes Ahead

The Federal Reserve will likely need to raise interest rates multiple times over the coming months to cool inflation running well above the FOMC's red line of 3%, even as the jump in energy costs from the Iran conflict has had a more-benign-than-feared effect on prices, former St. Louis Fed President James Bullard told MNI.

The most severe outcomes from the war have not been realized and so pricing around those fears have also been reduced despite the lack of a lasting military resolution, he noted. 

Yet core PCE inflation, which throws out the energy component, is running at 3.4% on a 12-month basis -- nearly a full percentage point and a half above the Fed's 2% goal, leaving the committee with limited room to wait, he said. Headline inflation is far above target at 4.1% in May.  

"The committee has to take on board that they've been a little too dovish on this and that they need to take action to reinforce credibility with the markets on inflation," Bullard said in an interview. "It's hard to tell a story that core PCE inflation is going to come down dramatically just because oil prices are less high than expected."    

Markets are pricing nearly 50% chance of a move at this month's meeting, but Bullard said September remains the more likely point for action, giving the committee time to assess whether lower oil prices are doing more to ease inflation than expected. 

A hotter-than-anticipated inflation report -- starting with Tuesday's CPI data -- could accelerate that timeline, especially as the labor market concerns that once justified a more patient approach are now off the table, he said.

"They likely would wait until September, because I think they legitimately would like to see if the decline in oil prices is having a lot more of an effect than people are expecting. And if that's true, then that's kind of diminishing the inflation argument," he said.

"They already have in their June SEP a benign outlook for inflation -- 0.2% every month for the rest of the year -- so it seems like it'd be fairly easy to surprise on the upside to that. So I think it won't be too long here, and we'll get either this report or subsequent reports will come in hotter than expected, and then the committee will feel like they have to move." (See MNI INTERVIEW: Fed Prepares To Hike On Sticky Inflation-Mester)

BYE DOTS

Bullard reckoned the Fed's dot plot isn't likely to survive under Kevin Warsh after the chairman withheld his own submission at his first FOMC meeting. Instead, the Fed may move toward a quarterly monetary policy report similar to those published by the Bank of England and the European Central Bank, with a baseline forecast that individual officials could then endorse or dispute. 

"I don't know that the dot plot is long for this world," Bullard said, citing structural flaws the committee never resolved such as dots that are unlinked to other projections and untethered to any names. Bullard himself broke with the committee and refrained from submitting a longer-run projection for the fed funds rate when he was on the FOMC. 

No dots from Warsh was "a good move on a tactical level," since it heads off speculation about which projection belongs to a chair who is making a point to move away from committing to future moves, Bullard said. 

"Why not just have a 30-page report" with box analyses of AI or other events and multiple scenarios, he said. 

"That's the full picture of here's where we think the economy is at this point, and that's really what the market and investors crave, and households that want to get a sense of considering everything on the table."

MNI: China's Slower Q2 GDP Points To More Pro-growth Measures

China’s economy likely slowed in the second quarter from Q1's 5.0%, with additional policy support likely needed in the second half to achieve the upper end of the government’s 4.5-5.0% annual growth target amid export uncertainty and weaker consumption, and investment, advisors told MNI.

Advisors and economists estimated Q2 GDP will likely print between 4.5-4.8%, with a higher H2 result requiring stronger fiscal support and targeted monetary easing.

While the economy could still achieve 5% growth this year due to favourable base effects, this would require H2 growth above 4.8%, said Cai Tongjuan, vice dean of the Chongyang Institute for Financial Studies at Renmin University, supported by faster government bond issuance, further interest-rate cuts, targeted monetary tools to boost consumption, increased purchases of unsold housing inventory and stronger efforts to ensure developers complete unfinished housing projects.

Gong Liutang, director of the Institute for Advanced Study at Wuhan University, predicting around 4.6% for Q2, expects a growth of 4.7-4.8% in both H2 and 2026. 

While some economists have called for additional stimulus, including new special treasury bond issuance as early as the Politburo meeting later this month, Gong argued such measures are more likely around September or October should growth risk falling below the target range. (See MNI INTERVIEW: China Likely To Announce New Fiscal Stimulus) Authorities have yet to complete around half of this year's planned CNY1.3 trillion in special treasury bond issuance, while fiscal revenue improved in H1, reducing the urgency for additional stimulus, he said.

Wen Bin, chief economist at China Minsheng Bank, who forecasts full-year growth of around 4.7%, expects Q2 GDP to expand about 4.5%. H1 fixed-asset investment growth likely further expanded the previous 4.1% fall to contract by 4.5%, while June retail sales may also decline further by 0.8% from May’s -0.6%, although industrial output may edge up to 4.6% in June from 4.5% earlier, he added.

The National Bureau of Statistics will release Q2 GDP and June activity data on Wednesday.

EXPORT DRIVER

Gong said exports would remain the economy's main driver in H2, likely repeating their strong contribution in 2025, when they accounted for more than 30% of GDP growth. However, fixed-asset investment, which uncharacteristically fell by 4.1% in the first five months, is likely to remain negative, he warned.

Although official estimates suggest the government's push to develop the so-called "six networks", including power grids and computing infrastructure, could generate as much as CNY7 trillion in investment this year and lift headline investment growth by 2-3 percentage points, Gong argued the bigger challenge is the failure to crowd in local government and private investment. High debt-servicing costs and weak business confidence continue to limit the multiplier effect, he said.

Cai added the slow pace of project-backed special bond issuance and weak returns on infrastructure projects are limiting the effectiveness of government-led investment, while manufacturing investment is also constrained by low-capacity utilisation. She expects fixed-asset investment growth to remain subdued in 2026, expanding around 2-3% year-on-year.

Cai also questioned the sustainability of strong export growth, arguing it is likely to slow in H2 as weaker external demand, a higher base of comparison, and persistent global uncertainties weigh on shipments, reducing exports' contribution to economic growth.

"If domestic demand fails to recover sufficiently in H2, the export slowdown could shave about 0.2-0.5 pp off full-year GDP growth," she explained.

Gong added that consumption will likely contribute more than 60% of annual growth. He expects retail sales growth to turn positive in H2 as measures to repair household balance sheets take effect, also highlighting the stronger performance of services consumption, which rose 5.4% y/y in January-May compared with 1.2% growth in goods consumption. He called on authorities to redirect part of the subsidies currently allocated to consumer goods trade-in programmes to services spending.

Whether consumption recovers in H2 will depend on progress in stabilising the property market and the effectiveness of employment policies, Cai said, adding consumer vouchers alone are unlikely to reverse the trend.

MNI: RBA Close To Peak, But Further Hike To 4.6% Possible

The Reserve Bank of Australia's recent emphasis on supply-side shocks suggests it believes the cash rate is close to its peak at 4.35%, though risks remain skewed towards one final increase to 4.6%, with Q2 inflation and inflation expectations likely to determine any move, prominent economists told MNI.

University of Melbourne Associate Professor Sam Tsiaplias said the RBA's recent communications were intended to highlight the risk that higher oil prices could generate second-round inflation over coming months by lifting expectations, wage demands and consumer spending.

"There's just a lot of uncertainty, and most likely the direction of the pass-through will be positive," he said. "We may see higher second-round inflationary effects because the risk is almost entirely skewed to the upside, and that might make it reasonable to get a pre-emptive hike." The Aug 10-11 meeting, for which markets assign around a 20% probability of a 25 basis-point hike, remains live, he said.

Tsiaplias said 4.6% would likely mark the peak of the tightening cycle, adding the Bank appeared willing to tolerate some labour-market weakness if it judged the risk of second-round inflation becoming embedded outweighed the short-term costs. "The uncertainty is mainly that you'll get higher inflation," he said. "It's probably reasonable for them to be thinking about one more rate hike, even if it does mean a little bit of pain in the labour market."

Tsiaplias said a speech by Assistant Governor Sarah Hunter last week did not represent a shift in the RBA's thinking but instead reinforced its longstanding focus on second-round effects and inflation expectations. "The RBA is trying to remind journalists and economists that this is something that's at the forefront of the decision-making process, so we shouldn't be too surprised if they do hike to counter the expected second-round effects," he said.

EXPECTATIONS KEY

Inflation expectations would likely determine the timing of any eventual easing cycle, with the Bank unlikely to cut rates until it had clear evidence expectations had moderated, he added. Repeated oil-price shocks could reinforce expectations more than a one-off event, making it increasingly important for the RBA to model their cumulative effects on wages and pricing behaviour, he said.

James Morley, professor of macroeconomics at the University of Sydney, said another rate increase would not surprise him, but recent data suggested policy was already sufficiently restrictive. Morley said weaker housing activity, softer consumer sentiment and a cooling labour market all indicated previous rate hikes were gaining traction, although another supply shock or a stronger-than-expected inflation outcome could still prompt further tightening.

The Australian Bureau of Statistics will release its June inflation data on July 29. 

While Hunter's speech was straightforward, it was timely because it clarified how the RBA would respond to persistent supply shocks that risked lifting inflation expectations, distinguishing them from temporary shocks that central banks would typically look through, he said. "The key message was explaining the Bank's reaction function to supply shocks and why persistent shocks that feed into inflation expectations warrant a policy response," Morley said.

SUPPLY-SIDE IMPACT

Morley said a key question was which measures of inflation expectations the RBA regarded as most informative, noting policymakers monitored both market-based and survey indicators. "The question is where the RBA sees the most informative signal that inflation expectations are surprising on the upside," he said.

Tsiaplias said the Bank would also eventually need to provide more evidence on the expected magnitude and timing of second-round pricing effects rather than discussing them in broad theoretical terms.

"What will be the magnitude of the impact on food prices? When is it expected to come to fruition? What do they think will happen to expectations? So being more precise about the particular factors that are at play, rather than the broad Phillips curve," he concluded.

MNI: Austria Open To Discuss 'Interesting' Spain EU Asset Plan

Austria will consider “positively” a new Spanish proposal to transfer part of the European Union’s stock of national debt into joint bonds to create a safe asset, a Finance Ministry spokesman told MNI on Monday.

Spain last week submitted a proposal for a European Sovereign Facility which would initially cover more than a third of states’ annual redemptions as well as fiscal deficits, and hopes to build a "coalition of the willing" to push it through. (See MNI: EU Safe Asset Plan Sees Positive Feedback-Spain Says)

”It's an interesting proposal that we'd like to discuss,” an Austrian Finance Ministry spokesman said. “There are still some open questions, but in principle, we view the idea of ​​discussing joint debt to finance public goods positively. In this context, the role of the euro should be strengthened.” 

Austria is considered one of the bloc’s more fiscally hawkish member states and typically opposed to pooling debt, though its position has evolved under Finance Minister Markus Marterbauer.

In September last year he said “much discussion” was needed before EU joint debt becomes a reality, but that “step by step we are going in this direction. As an economist, I think this is the right direction.”

“We do not comment on statements made by other EU member states,” a spokesperson for the German Finance Ministry said when contacted by MNI.

MNI INTERVIEW: AI Raises Rates Before Boosting Growth - Rachel

The boost to growth from AI is likely still to come while the impact of the technology in pushing up the neutral level of interest rates may already have been felt, the co-author of the influential “secular stagnation” paper told MNI.

"We have to consider the possibility that the current high level of longer-term interest rates already reflects the expectation of an AI boom," UCL Assistant Professor Lukasz Rachel, a former Bank of England economist who wrote the famous paper on the decline of the neutral interest rate with Larry Summers in 2019, said in an interview.

Rachel disagreed with those who have argued that AI will raise potential growth more than interest rates, though the lagged effect of its impact in boosting productivity should mean that its fiscal impact from now on should nonetheless tend to be positive, he said. (See MNI INTERVIEW: AI Should Boost Growth More Than Rates)

If this is the case, then "the bad stuff — from the fiscal perspective — has already happened," he said, noting that interest rates have already "increased a lot” since the secular stagnation paper.

In one scenario, if AI increases productivity growth by 0.75 percentage points and company mark-ups go up a couple of percentage points then the neutral level of rates will rise by just under a percentage point, he said at a recent conference at the BOE.

"I think you'd be hard pressed to find anything that goes the other way, which would say that [the neutral rate] moves less than [growth]," he said in the interview.

Still, "if there is one thing that can represent an upside risk for fiscal sustainability, it is that productivity upside risk from AI." (See MNI INTERVIEW: AI Boom Doesn't Justify Lower Rates - Haskel)

Given that neutral rates do seem to have risen in recent years, it would be logical for any impact from AI due to investor expectations to have been felt before its growth effect kicks in, Rachel said.

"If you interpret that as AI driven, which I think there's some legs to it because look what's happening in the stock market, for example ... maybe there's not that much more that that is going to happen in the bond market," he said.

DISINFLATION

Econometric models provide different estimates of the disinflationary impact of AI, depending partly on whether consumers perceive it as a boon or a threat, and adjust their savings accordingly, Rachel said.

"There's going to be a big boost to supply, and so for a given dynamics of wages, there's going to be a big reduction in costs, and therefore that could act as a disinflationary force," he said. "To the extent that the productivity growth is higher and people perceive that technological change, they also adjust demand ... we need to save less today."

Alternatively, however: "If AI leads to a ton of uncertainty at the worker level, and that uncertainty is so overwhelming the positive productivity effect ... goes towards higher saving and less consumption ... if you take that story to the extreme, you could generate a disinflationary impact through precautionary saving."

GLOBAL EFFECTS

AI’s effect on rates should be fairly similar across economies, though different approaches to the technology by governments could lead to different outcomes, Rachel said.

"In terms of the impact of the use of the technology and the potential productivity gains, I think it's a pretty global story," he said, adding that "you could tell a story where it's more backward economies that are going to ... have some easier time catching up."