Fitch Ratings recently upgraded the Issuer Default Ratings (IDRs) of Industrial Bank Co., Ltd. (Industrial Bank, BBB+/Stable/bb-) and Shanghai Pudong Development Bank Co., Ltd. (SPD Bank, BBB+/Stable/bb), driven by government support.

This action primarily considers the importance of the provinces and municipalities where these banks are located to the central government, with Fitch assessing an increased likelihood of timely support from the authorities if needed.

Concurrently, a decline in growth appetite and reduced shadow banking risks have supported Fitch's recent upgrades to the Viability Ratings (VRs) of five medium-sized Chinese banks, including Industrial Bank and SPD Bank.

The other three banks are China Merchants Bank Co., Ltd. (CMB, A-/Stable/bbb-), China CITIC Bank Co., Ltd. (CITIC Bank, A-/Stable/bb), and China Everbright Bank Co., Ltd. (CEB, BBB+/Stable/bb).

Following the VR upgrades, the IDRs for these five banks remain driven by expectations of government support.

The IDR upgrades for Industrial Bank and SPD Bank reflect Fitch's increased emphasis on these banks' regional importance and their close linkages with local governments, including the supervisory role of the central government and Shanghai municipal authorities for SPD Bank.

Both Industrial Bank and SPD Bank were designated as Domestic Systemically Important Banks (D-SIBs) in 2021.

Since then, both banks have continued to strengthen their business profiles.

Industrial Bank has further cemented the importance of its interbank business platform, while SPD Bank has expanded its retail footprint and deepened its role in promoting Shanghai's leading economic and financial center status.

The support outlook for China's larger and medium-sized banks ranges from "Stable" to "Improving," reflecting their domestic systemic importance, close linkages with central or local governments, and the authorities' continued high willingness to support the banking sector.

On another front, the five larger and medium-sized banks are reducing their shadow banking exposures, and transparency around such activities has improved, indicating reduced risk appetite which helps support their underlying asset quality.

These developments offset the negative impact of persistent asset quality risks stemming from weak domestic demand and subdued household confidence.

Nevertheless, exposures to entrusted investments and off-balance-sheet wealth management products continue to affect the assessment of the risk profiles and financial metrics of many Chinese banks, as these instruments can distort disclosed financial indicators.

This impact is often more pronounced for medium-sized banks, which typically have higher exposures to these products than state-owned banks.

At the same time, it is noted that these banks have reduced their related exposures in recent years.

Fitch believes that easing net interest margin (NIM) pressure, continuously building capital buffers, and ample domestic liquidity will also enable China's larger and medium-sized banks to better navigate macroeconomic and other external headwinds, positively impacting their risk profiles and asset quality.

Stronger-than-expected economic growth, easing deflationary pressures, robust export performance, and a slower pace of NIM compression prompted Fitch to revise the outlook for China's banking sector from "Deteriorating" to "Neutral" in June 2026.

Furthermore, as sector transparency improves and supports the overall risk assessment, upward pressure may emerge on China's banking sector Operating Environment Score, currently at 'bbb-/Stable'.

Positive developments in the banking sector in recent years have led to VR upgrades for several banks.

Should other Fitch-rated banks demonstrate similar and sustained improvements, Fitch may take further positive rating actions on their VRs or the sector's Operating Environment Score in the future.

Despite facing various headwinds, China has shown greater resilience than most Asian peers under Fitch's adverse scenario assumptions regarding the Middle East situation.

The Operating Environment Score for China's banking sector is lower than that of some regional peers in smaller markets, primarily reflecting lower transparency on key sector risks such as shadow banking and asset quality classification.

However, Fitch believes the greatest risks remain concentrated among smaller, unrated banks within China's banking system.