The National Financial Regulatory Administration recently reiterated the need to "study diversified methods to replenish the capital of small and medium financial institutions," sending a strong policy signal. Currently, some small and medium-sized banks are facing a critical shortage of core tier-1 capital, making it a practical necessity to accelerate the strengthening of their capital buffers to prevent and resolve financial risks. Against this backdrop, local government special bonds, which have proven effective in practice for replenishing small and medium bank capital, have once again become a focal point of market discussion. Is it now the right time to normalize the issuance of special bonds for small and medium banks? What other diversified channels are available in the future?

The Party Committee of the National Financial Regulatory Administration recently held an expanded meeting, mentioning the need to "promote capital replenishment for large state-owned commercial banks and study diversified methods to replenish the capital of small and medium financial institutions." This marks the first time since 2025, when the administration explicitly stated it would "comprehensively adopt measures such as capital replenishment, mergers and reorganizations, and market exits to classify and resolve risks," that the regulator has detailed the deployment of capital replenishment for small and medium financial institutions in a system-wide meeting. The former China Banking and Insurance Regulatory Commission mentioned the multi-channel replenishment of capital for small and medium banks in its annual work conferences for three consecutive years from 2021 to 2023; however, this task was not explicitly mentioned in the regulatory work conferences of 2024 and 2025.

Nevertheless, on March 13, 2025, the expanded meeting of the Party Committee of the National Financial Regulatory Administration proposed that 2025 should "comprehensively adopt measures such as capital replenishment, mergers and reorganizations, and market exits to classify and resolve risks." On January 15 of this year, during the 2026 regulatory work conference, the administration also mentioned "supporting financial institutions in replenishing capital through multiple channels" when reviewing the regulatory work of 2025. Two months later, the progress made last year was further refined into "studying diversified methods to replenish the capital of small and medium financial institutions."

According to Ni Jun, Chief Banking Analyst at GF Securities, this is an inevitable choice driven by four overlapping factors. First, in recent years, the capital adequacy ratios of small and medium banks have consistently been below the industry average, with some institutions' core tier-1 capital approaching regulatory red lines. The continuous consumption of capital for non-performing asset disposal has increased regional financial risks, making capital replenishment key to preventing regional risks. Second, the ongoing narrowing of net interest margins has significantly weakened the internal capital replenishment capacity of small and medium banks, while external financing channels remain limited, exacerbating the imbalance between capital supply and demand. Third, the industry's consolidation and merger processes are expected to accelerate in 2026, and adequate capital is a prerequisite for institutions to participate in integration and achieve transformation. Fourth, the earlier demonstration of large state-owned banks replenishing capital through special government bonds has created an urgent need to simultaneously address the capital shortfalls of small and medium institutions, building a capital safety net covering the entire industry. Hence, regulators have once again placed capital replenishment for small and medium institutions in a key policy position.

For large state-owned banks, this year's government work report explicitly proposed issuing 300 billion yuan in special government bonds to support their capital replenishment. As an important component of a package of incremental policies, the "state plan to increase core tier-1 capital for six large commercial banks" was first mentioned on September 24, 2024. Li Yunze, head of the National Financial Regulatory Administration, clarified at the time that the plan would be implemented orderly, following the principles of "coordinated advancement, phased batches, and bank-specific strategies." In 2025, China Construction Bank, Bank of China, Bank of Communications, and Postal Savings Bank of China received the first batch of 500 billion yuan in special bond injections. By the end of the third quarter of 2025, the core tier-1 capital adequacy ratios of these four large state-owned banks were 14.36%, 12.58%, 11.37%, and 10.65%, respectively, representing increases of 0.38, 0.76, 1.12, and 1.44 percentage points compared to the end of the first quarter of 2025. Consequently, it is widely expected that this year's 300 billion yuan in special bonds will be used to replenish the capital of Industrial and Commercial Bank of China and Agricultural Bank of China. By the end of the third quarter of 2025, the core tier-1 capital adequacy ratios of ICBC and ABC were 13.57% and 11.16%, respectively, both declining from 14.1% and 11.42% at the end of 2024.

For small and medium financial institutions, especially small and medium banks, the lack of external capital replenishment channels has long been a persistent challenge. Under the overall regulatory direction of "reducing quantity and improving quality" for small and medium financial institutions, many small and medium banks are actively replenishing capital through self-help measures. According to publicly disclosed approvals from financial regulators, as of March 18, over 40 small and medium banks have increased their registered capital this year through methods such as cash capital increases, rights issues/targeted share placements, capital reserve conversions, and profit conversions. Overall, the capital changes for these banks have been relatively small. Shanxi Bank saw the largest increase, with a direct capital injection of over 1.4 billion yuan. Other banks with increases exceeding 100 million yuan include Bank of Chengdu, Dongying Bank, Nanchang Rural Commercial Bank, Taian Shanghai Rural Commercial Bank Village Bank, Huaian Xingfu Village Bank, and Jiangxi Gancheng Rural Commercial Bank. The sources of new capital involve local government funds, market-based tools, and shareholder capital increases. For instance, Shanxi Bank, which saw the largest approved capital increase this year, received its new capital entirely from the Shanxi Provincial Department of Finance. Bank of Chengdu's nearly 500 million yuan capital increase came from the conversion of convertible corporate bonds, while Jiangxi Gancheng Rural Commercial Bank's 110 million yuan increase resulted from an investment by Jiangxi Rural Commercial United Bank.

In contrast, capital replenishment tools such as bond issuances provide larger capital amounts. This year, banks such as Bank of Guangzhou, Qishang Bank, Bank of Qingdao, Dongguan Rural Commercial Bank, Zhongshan Rural Commercial Bank, and Jilin Bank have been approved to issue capital replenishment tools like tier-2 bonds, perpetual bonds, and capital bonds with no fixed maturity. Among them, Jilin Bank and Bank of Guangzhou were approved for up to 15 billion yuan in tier-2 capital bonds and up to 10 billion yuan in capital tools with no品种 restrictions, respectively. However, in terms of actual capital replenishment effectiveness, channels such as cash capital increases and rights issues/targeted share placements are more advantageous. A commercial bank's total capital includes tier-1 and tier-2 capital, with tier-1 capital further divided into core tier-1 capital and other tier-1 capital. Core tier-1 capital is the most critical buffer in the entire capital safety cushion, as losses from daily operations are first absorbed by this most solid and risk-bearing component.

"Cash capital increases, including introducing new shareholders or existing shareholders making additional capital contributions, represent a true form of 'external capital replenishment,'" said Zeng Gang, Chief Expert and Director of the Shanghai Finance and Development Laboratory. He explained that new funds flowing into the bank increase paid-in capital, and if the issuance price exceeds the face value, the share premium is included in capital reserves, resulting in a net increase in core tier-1 capital. This is the most direct and effective way to replenish capital. Zeng Gang pointed out that rights issues/targeted share placements are essentially the same as cash capital increases, both involving issuing new shares to specific or non-specific shareholders to raise real funds. As registered capital increases, real incremental funds enter the bank, leading to a net increase in core tier-1 capital. Currently, targeted placements have become the mainstream capital increase channel for non-listed small and medium banks.

During this year's National People's Congress sessions, many delegates proposed optimizing the issuance of local government special bonds to enhance policy support for small and medium bank capital replenishment. For example, Liu Ya, a National People's Congress delegate and President of the Export-Import Bank of China Beijing Branch, suggested that, under the guidance of national financial regulators, provinces should regularly issue special bonds for small and medium banks to help them establish long-term capital replenishment mechanisms. A delegate from Zhejiang proposed opening channels for small and medium financial institutions to replenish capital through a "self-review and self-issuance" model using special bonds. In July 2020, the State Council executive meeting decided to allow local government special bonds to reasonably support small and medium banks in replenishing capital. As an innovative tool, the first special bond for small and medium banks was issued in December of that year. Issuances concentrated in 2023, with follow-ups in 2024. According to previous disclosures by the People's Bank of China, from 2020 to 2022, 550 billion yuan in new local government special bonds were allocated specifically for replenishing the capital of small and medium banks.

However, some industry experts oppose the regular use of local special bonds for small and medium bank capital replenishment. Wen Laicheng, a professor at the Central University of Finance and Economics, stated that state-owned capital already dominates the banking industry, making it unnecessary to use equity injections to ensure controlling stakes. Using special bonds to replenish small and medium bank capital is currently aimed at preventing financial risks and stabilizing development, making it unlikely to become a regular support measure. Even if special bonds are used again in the future, selectivity is necessary to ensure repayment and prevent fiscal risks. Ni Jun also believes that the comprehensive normalization of special bonds for small and medium banks is relatively limited. To avoid blurring the boundaries between fiscal and financial risks and prevent moral hazard and excessive local government intervention, it is difficult to break through existing fiscal discipline frameworks in the short term.

Nevertheless, in July of last year, Jilin Province issued 26 billion yuan in special bonds to support the development of small and medium banks. The raised funds were transferred from the Jilin Provincial Department of Finance to Jilin Financial Holding Group, which then invested in Jilin Rural Commercial Bank to help improve its capital adequacy and risk resilience. This case is regarded by the industry as a "restart" of special bonds for small and medium banks. "Combined with the latest regulatory signals for 2026, the policy pace for supporting small and medium banks with special bonds has significantly accelerated," Ni Jun said. He noted that the Jilin case represents an upgrade from dispersed capital injections to a model serving provincial rural commercial bank integration, providing a replicable practice sample for other regions. At the same time, the regulatory statement about "studying diversified methods to replenish the capital of small and medium financial institutions" sends a supportive signal. Therefore, it is expected that 2026 may see innovations such as expanded special bond quotas or adjusted uses (e.g., shifting from capital replenishment to merger support).

In practical policy guidance, Ni Jun believes that special bonds will still be used as key relief tools in phases, with innovations in supporting mergers and reorganizations becoming more常规化. Additionally, Li Yunze mentioned during this year's National People's Congress sessions that "leveraging more social funds through market-based methods, such as insurance funds, can be studied and explored," further expanding the market's imagination. Ni Jun stated that long-term funds like insurance and social security funds investing in shares, as well as innovative models like convertible capital instruments, will gradually expand to meet the replenishment needs of different types of small and medium banks, forming long-term support mechanisms. As industry views have repeatedly emphasized, capital replenishment is only one step in the reform and risk resolution of small and medium financial institutions. In the future, measures such as simultaneously introducing strategic investors and optimizing ownership structures and corporate governance will be needed to help small and medium banks transition from external "blood transfusions" to internal "blood generation," laying the foundation for long-term high-quality development.