Insights and key challenges related to China’s financial market

Among the wide range of case studies, China’s economy stands out for its significance in the global economy. In particular, the size of China’s financial market and its relationship with global financial markets make it a pivotal area of study for global markets, given its significant contribution to China’s economic output. Despite this, China’s status as an emerging market has shown unique dynamics in its financial markets, raising questions about potential challenges it may face. This article will review some insights related to the Chinese financial market, focusing on insights into the Chinese banking sector and bond market, and analysing key challenges that may have significant implications for the Chinese financial market.

A significant component of China’s financial market is the Chinese banking sector. The banking sector dominates the financial market through contributions from Chinese state-owned commercial banks, including the big 4: Industrial and Commercial Bank of China (ICBC), China Construction Bank, Agricultural Bank of China, and Bank of China. These commercial banks, which are mainly controlled by the government, have contributed significantly to the development of the economy by offering financial services, as they hold a large share of assets, deposits, and loans. For example, ICBC has financed major projects in the past, such as the shanty towns renovation project in Changchun’s Yitong River Basin (ICBC, 2017), which have contributed to economic development, and ICBC has provided loans to state-owned enterprises to drive investment and economic activity. Additionally, state-owned banks can also act as essential policy tools to promote financial stability in China’s economy. For instance, when there are monetary policy changes, such as a decrease in interest rates, state-owned banks respond to these changes to affect the availability of credit, depending on the specific change implemented.

A deep look at the recent performance in bond markets provides a broader insight into China’s financial market. The Chinese bond market is one of the most significant in the world, and therefore, it deserves greater attention. An example of a bond type significant in the Chinese bond market is Chinese government bonds, which are relatively attractive due to their low risk stemming from the Chinese government’s strong balance sheet. In the bond market, yields on Chinese government bonds have recently increased, particularly for 10-year and 30-year bonds (Sandlund, 2025). More specifically, in September 2025, the yields on 10-year Chinese government bonds rose to 1.82%, and the yields on 30-year Chinese government bonds rose to 2.21% (Sandlund, 2025). The rises in these yields occurred after the yields on these bonds reached record lows in 2024, which were influenced by factors such as deflationary pressures (Sandlund, 2025). An increase in bond yields can attract investors, leading to higher returns and, in turn, stronger investor sentiment among those who invest in these bonds.

Despite the previous insights provided, it is also essential to understand some key challenges that could influence the Chinese financial market. One of these challenges refers to the Chinese property sector crisis. The Chinese property sector crisis is a financial crisis that has posed a significant economic challenge, as major developers in the real estate sector have collapsed, such as Evergrande, which defaulted in 2021 due to excessive borrowing and has significantly contributed to the property sector crisis, which is still an issue today for China’s financial market. This has resulted in financial distress spreading across the sector and the broader economy, as the property sector is important to China’s growth. This crisis has different implications for China’s financial market. There is greater distress in the banking sector regarding lending to real estate developers, following Evergrande's excessive borrowing that led to its default in 2021. This means that Chinese banks may be concerned about risk when lending to property developers, as defaults could turn these loans into non-performing loans and potentially decrease banks’ profitability and capital reserves, which would be problematic, especially for smaller banks that may not have the ability to withstand the same level of systemic risk as the major state-owned commercial banks.

Additionally, macroeconomic slowdown and deflationary pressures in the economy have put pressure on the Chinese financial market. The macroeconomic slowdown has been characterised by weak domestic demand, with low consumer confidence driven by concerns about economic stability and the property sector (Zipser, 2025). Low consumer confidence in the economy could lead to reduced household spending and potentially higher savings rates, thereby slowing consumption-driven growth. For example, it was reported that net household savings deposits increased from 11.46 billion renminbi in the first half of 2024 to 17.94 trillion renminbi in the first half of 2025 (Zipser, 2025), signifying a significant increase in savings in China. Deflationary pressure is also a major concern for China’s financial market, which could be attributed to weak domestic demand. These deflationary pressures can be observed in the producer price index (PPI), where China’s PPI declined by 2.2% year-on-year in November 2025 (Bloomberg, 2025), indicating a decline in factory-gate prices. Although China’s CPI increased by 0.7% year-on-year in November 2025 (National Bureau of Statistics of China, 2025), which could imply an improvement in deflationary pressures to some extent, the decline in PPI still raises concerns about deflationary pressures in China. Deflationary pressures can reduce profits and earnings per share for publicly listed Chinese companies, potentially leading to a decline in stock market indices as Chinese equities become less attractive to investors.

In conclusion, the analysis of China’s financial market reveals many intriguing dynamics that shape it into what it is. The dominant position of many big state-owned commercial banks, such as the ICBC, and their influence on the economy through their activities may suggest optimism about China’s financial market. Moreover, despite previous struggles with yields on government bonds, recent increases in yields on 10-year and 30-year government bonds may signal optimism in investor sentiment. However, there have also been concerns regarding the property sector crisis, weak domestic demand and deflationary pressures, and how these factors could impact the Chinese financial market and the economy. These concerns should be considered for further analysis to evaluate how these issues could be addressed in the future.

Bibliography

Bloomberg (2025) China’s Consumer Prices Rebounded Without Easing Deflation Fears. Available at: https://www.bloomberg.com/news/articles/2025-12-10/china-consumer-inflation-picks-up-to-fastest-pace-in-over-a-year (Accessed: 11 December 2025).

ICBC (2017) ICBC’s Financing for Government Service Procurement Gains Steam. Available at: https://www.icbc.com.cn/icbc/en/newsupdates/icbc%20news/ICBCsFinancingforGovernmentServiceProcurementGainsSteam.htm#:~:text=In%202016%2C%20ICBC%20financed%20a,rural%20road%20construction%20project%20in (Accessed: 2 December 2025).

National Bureau of Statistics of China (2025) Consumer Price Index in November 2025. Available at: https://www.stats.gov.cn/english/PressRelease/202512/t20251211_1962020.html (Accessed: 11 December 2025).

Sandlund, W. (2025) ‘Chinese government bond yields rise to 2025 high’, Financial Times, 10 September. Available at: https://www.ft.com/content/36286124-ef40-44b0-8d7e-37baafc1a835 (Accessed: 4 December 2025).

Zipser, D. (2025) ‘Mid-year update: Five surprises from China’s consumer market’, McKinsey & Company, 13 August. Available at: https://www.mckinsey.com/cn/our-insights/our-insights/mid-year-update-five-surprises-from-chinas-consumer-market (Accessed: 5 December 2025).