China is stepping up efforts to reduce risks in its financial sector, as evidenced by its moves to address problems at two financial institutions.

The National Financial Regulatory Administration announced on Friday that it would place Z-Bank under regulatory supervision for one year, and also approved the bankruptcy of Zhongrong International Trust, according to two separate statements.

These steps represent the first major regulatory move under Deng Xiangchun, a veteran banking and insurance regulator who took over as head of the authority in late May.

These moves reflect a shift in approach to China's $60 trillion financial system, as authorities become more willing to take decisive action to contain financial risks and strengthen market discipline.

This comes as Chinese financial institutions face a sharp rise in non-performing loans and record-low profit margins, under pressure from an economy struggling to regain momentum.

Z-Bank, headquartered in Wuhan, is one of the few private commercial banks specializing in online banking. It rapidly expanded in digital consumer lending, but that rapid expansion left the bank burdened for years with regulatory violations, weak internal controls, and deteriorating asset quality.

The regulatory measure, effective July 3, aims to protect depositors' funds and support the bank's stability by placing it under direct state management.

End of a Major Player in China's Shadow Banking Sector

The bankruptcy of Zhongrong International Trust marks the formal end of one of the most prominent players in China's shadow banking sector.

Once one of the country's largest trust companies and a key financial arm of the troubled Zhongzhi Enterprise Group, it became one of the most prominent victims of the real estate crisis due to its heavy exposure to property financing and unconventional credit assets.

The company first defaulted on wealth management product payments in 2023, raising fears of contagion to the broader financial system.

Despite government-supervised receivership and restructuring attempts, it failed to restore solvency, paving the way for its liquidation.

A New Vision for Financial Stability in China

Liao Zhiming, an analyst at Huayuan Securities, said: 'Financial stability is no longer synonymous with keeping every troubled institution alive.'

He added: 'Authorities appear more receptive to the idea of letting weaker firms fail, reflecting growing confidence in the ability to contain risks that could threaten the entire financial system, and signaling a substantial reduction in financial vulnerabilities that have accumulated over the years.'

Liao noted that Z-Bank's liabilities to other banks at the end of 2024 were much smaller than those of Baoshang Bank at the time of its regulatory takeover in 2019, meaning the impact of this move on the bond market would be very limited compared to the Baoshang case.

In 2019, the sudden government takeover of Baoshang Bank shocked markets after the government imposed losses on some creditors, upending the long-held belief that the government would always step in to rescue financial institutions. These intensive liquidation actions come after years of behind-the-scenes reforms.

In a speech at the Lujiazui Forum in Shanghai, Chinese Vice Premier He Lifeng said the number of high-risk small and medium-sized financial institutions had dropped by more than 70% compared to 2022 levels. He reiterated Beijing's tough stance, vowing that authorities would resolutely remove financial institutions that are unable to meet their obligations and lack the essentials for continued operation.