Capital Adequacy Ratio: The Lifeline Gauging Chinese Banks' Bad‑Debt Resilience

The State Administration of Financial Regulation’s new Commercial Bank Capital Management Measures (effective 1 January 2024) define the capital adequacy ratio (CAR) as the ratio of regulatory‑compliant capital net to risk‑weighted assets, measuring a bank’s ability to absorb losses with its own capital.

Risk‑Weighting Framework

Risk‑weighted assets are calculated by assigning weights to assets based on risk: government bonds and central‑bank bills 0 %, corporate loans and personal business loans 100 %, sub‑prime loans and derivatives 1250 %. This differentiated weighting avoids treating high‑risk and low‑risk assets equally and reflects true risk exposure.

Three‑Tier Capital Structure

Capital is divided into three layers:

Core Tier 1 capital : highest loss‑absorbing capacity, includes paid‑in capital, capital reserves, surplus reserves, and undistributed profits.

Tier 1 capital : supplements core Tier 1, represented by perpetual bonds and preferred shares, absorbs losses when core Tier 1 is insufficient.

Tier 2 capital : lowest loss‑absorbing capacity, includes subordinated debt and excess loss reserves, used only in bankruptcy liquidation.

Regulatory Minimums

Basic requirements are:

Core Tier 1 ≥ 5.0 %

Tier 1 ≥ 6.0 %

Total capital ≥ 8.0 %

For non‑systemically important banks, after a 2.5 % reserve, the minima become Core Tier 1 ≥ 7.5 %, Tier 1 ≥ 8.5 %, Total ≥ 10.5 %.

Domestic systemically important banks (D‑SIBs) must add 0.25 %–1.5 % extra capital, fully satisfied by core Tier 1. Global SIBs face even higher additional requirements and must meet TLAC standards.

2025 Capital Landscape

At the end of 2025, the overall commercial‑bank CAR was 15.46 %, Tier 1 12.37 %, and core Tier 1 10.92 %—slightly down YoY but well above regulatory floors.

Six State‑Owned Large Banks

Average CAR 18.16 % and core Tier 1 >12 %, indicating strong buffers. Key figures:

Industrial and Commercial Bank of China: CAR 18.76 %, Tier 1 14.94 %, Core Tier 1 13.57 %.

China Construction Bank: CAR 19.51 %, Tier 1 15.28 %, Core Tier 1 14.48 %.

Bank of China: CAR 18.67 %, Tier 1 14.63 %, Core Tier 1 12.20 %.

Agricultural Bank of China: CAR 17.45 %, Tier 1 13.89 %, Core Tier 1 11.42 %.

Bank of Communications: CAR 16.59 %, Tier 1 13.12 %, Core Tier 1 10.24 %.

Postal Savings Bank: CAR 14.57 %, Tier 1 11.89 %, Core Tier 1 10.52 %.

12 Nationwide Joint‑Stock Banks

Average CAR 13.58 %—above the minimum but noticeably lower than state‑owned peers. Highlights:

China Merchants Bank: CAR 16.28 %, Tier 1 13.15 %, Core Tier 1 12.03 % (near state‑owned levels).

Most banks have core Tier 1 below 10 %; several (Huaxia, Guangfa, Hengfeng, Bohai) fall below 9 %, approaching the 7.5 % regulatory red line, indicating capital‑supplement pressure.

Rapid loan expansion into high‑risk sectors (manufacturing, tech finance) accelerates capital consumption.

Conclusion

Capital adequacy is both a regulatory floor and an operational lifeline for banks. 2025 data show state‑owned banks remain well‑capitalized, while joint‑stock banks exhibit divergent strength and emerging capital strain. Under the stricter new regime, banks must balance scale, profitability, and capital safety across business, product, technology, and management dimensions to maintain a robust risk buffer.