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THIS WEEK:

China’s small and medium-sized banks heading for restructuring, Premier Li Qiang chairs State Council meetings, another China and Philippines incident in the South China Sea, China spotlights water resource litigation, and state media and directives hint at China’s high-tech trifecta strategy.

1. China’s Small and Medium-Sized Banks Heading for Restructuring

What Happened: Laden with mountains of nonperforming loans and bad assets, more than 60 regional and rural banks in China have been dissolved or merged in 2024.
 
The Struggle: Struggling regional and rural banks have become the exception to the continued robustness of the Chinese banking system. Urbanization and frenzied construction in the past two decades were largely funded by household bank depositors and retail investors who bought sophisticated but risky wealth management products that promised high returns.
 
Time and Again: This is not the first time these small and medium-sized banks have undergone restructuring. The expansion and contraction of rural banking institutions have mirrored boom-and-bust growth cycles in the past few decades, though no obvious improvement in lending practices or corporate governance has been observed after each restructuring.
 
Why It Matters: Even though China’s banking sector as a whole has been able to withstand the property crisis, some of the smaller regional banks might not survive. The approximately 3,800 small and medium-sized regional banks are the weakest link in the financial sector. With combined assets of RMB 55 trillion ($7.5 trillion), they account for 13% of China’s total banking assets. Notably, the smaller rural banks can only absorb savings from local depositors as per banking regulations, and they tend to local government–related projects. Thus, their financial viability is largely determined by the strength of their local economies.
 
By Lynette H. Ong, Senior Fellow on Chinese Society, Center for China Analysis
 
Learn More: Lynette wrote on China’s indebted rural banks in CCA’s most recent article, The Weakest Link in China’s Debt-Fueled Growth Model.

2. Premier Li Qiang Chairs State Council Meetings

What Happened: On August 16, Premier Li Qiang chaired a full State Council meeting to study the guiding principles of the recent Third Plenum.
 
Unity, Determination: At the meeting, Li emphasized the importance of unity and determination in implementing the ongoing reform plans and completing the annual economic and social development goals. The key areas discussed were reforming the fiscal and taxation system, building a unified national market, promoting urbanization, expanding domestic consumption, and promoting opening-up and the rule of law. Li also stressed the importance of improving communication between the government and business, listening to the business community, and solving their practical difficulties. 
 
Better Followers: A State Council executive meeting followed on August 19, where the Party Central Committee initiated a month-long training for above-vice-minister-level Party cadres in Xi Jinping Thought. The goal is to make cadres align with Xi Jinping’s wishes by fully understanding the decisive implication of the “Two Establishments,” meaning the core position of Xi as the “helmsman” and Xi’s thoughts as the “north star.”
 
Why It Matters: Xi Jinping has stayed true to his strategic vision for China, and his deputies are following his lead. However, it remains to be seen how flexible and effective he and his followers will be in implementing the above plans.
 
By Lobsang Tsering, Senior Research Associate, Center for China Analysis
 
Learn More: For more on the Third Plenum’s guiding principles, read CCA Fellow Neil Thomas’s Why Did Xi Jinping Stick to His Guns at China’s Third Plenum?

3. Another China and Philippines Incident in the South China Sea

What Happened: Over the weekend, China and the Philippines were again embroiled in an incident near two disputed shoals in the South China Sea (SCS).

The Details: According to Manila, while carrying out a resupply mission of Philippine outposts at Nanshan and Flat Islands, two Philippine Coast Guard (PCG) patrol boats were rammed by two China Coast Guard (CCG) vessels around 20 nautical miles southeast of Sabina Shoal. The ramming resulted in a three-foot hole in one PCG vessel and a five-foot hole in the other.

CCG Said, PCG Said: The CCG released a video of the incident on their website, claiming that the PCG undertook “dangerous maneuvers” that resulted in the collisions. It also declared that the CCG’s “control measures” were justified, as the PCG vessels were “illegally intruding” into “Chinese-administered waters” and ignored “repeated warnings” to halt operations. The PCG claimed it encountered “unlawful and aggressive maneuvers from CCG vessels” that resulted in collisions and structural damage to both patrol boats. The PCG added that “despite these incidents, both PCG vessels remain committed to their mission of delivering essential supplies to personnel stationed on the islands.”

Why It Matters: Having recently agreed to de-escalation mechanisms in the SCS, this incident represents a setback for diffusing tensions between the two claimants. The U.S. State Department issued a strongly worded statement about the incident, condemning the Chinese actions and reiterating U.S. mutual defense treaty commitments to the Philippines in the event of an “armed attack” against Philippine armed forces or public vessels.

By Lyle J. Morris, Senior Fellow on Foreign Policy and National Security, Center for China Analysis

Learn More: Read about Chinese nationalism, PRC resolve, and crisis escalation in this issue paper by CCA Fellow Andrew Chubb.

4. China Spotlights Water Resource Litigation

What Happened: At a press conference on Monday, the Supreme People’s Procuratorate (SPP) “attributed the improved protection of public water resources to enhanced cooperation between administrative and procuratorial authorities.”
 
Water First: Between January 2023 and June 2024, Chinese procuratorial organs handled 117,000 public interest litigation cases related to environmental and resource protection. According to the SPP, the highest procuratorial organ in China, 48,000 of these cases were related to water resources. In 2022, the Ministry of Water and the SPP formed a collaboration mechanism to solve “complex cases in critical areas, effectively safeguarding public interests and driving continuous improvements in water management.”
 
The Way Forward: Given the success of the collaboration, both departments are deepening their collaboration and expanding cooperation to new areas, including flood and drought prevention. Chinese procuratorates will intensify efforts on litigation concerning “carbon-related matters, including greenhouse gas emissions, high-energy-consuming and high-carbon projects, and the disruption of natural resources' carbon sequestration capacity.”
 
Why It Matters: The collaboration between the SPP and the Ministry of Water reinforces that legislative and judicial mechanisms play an integral role in setting the tone for how environmental issues are prioritized and responded to in society. Continued efforts to develop and set clear policies, coupled with avenues for dispute resolution and penalty enforcement, will be crucial as new climate issues arise.

By Taylah Bland, Fellow on Climate and the Environment, Center for China Analysis

Learn More: Read how Climate Litigation Can Power China’s Low-Carbon Transition by ASPI Schwarzman Fellow Daria Kurushina.

5. State Media and Directives Hint at China’s High-Tech Trifecta Strategy

What Happened: Between August 17 and 19, Chinese state media and official directives outlined key elements of the tech-driven modernization strategy central to the Third Plenum.
 
High-Tech Trifecta: China’s high-tech strategy is anchored by three pillars and was recently laid out in three separate items: a People’s Daily article stressed the urgency of developing a skilled labor force for high-tech manufacturing, a National Development and Reform Commission directive enjoined channeling private investment into vital infrastructure projects by removing financial and regulatory barriers, and an Economic Daily piece emphasized the importance of private companies in leading fundamental research. These coordinated efforts reflect Beijing’s broader strategy to align labor, capital, and enterprise with its economic objectives.
 
Strategic Context: China’s high-tech strategy emerges amid slowing growth, rising labor costs, and an aging population, straining the traditional development model. Externally, geopolitical tensions and fragmented supply chains heighten the need for technological self-reliance. By advancing areas like artificial intelligence and biotechnology, China seeks to strengthen its position in the global tech value chain and reduce vulnerability to external pressures.
 
Why It Matters: China’s focus on self-sufficiency offers a pathway to leadership in emerging industries but risks deepening bifurcation from Western markets, limiting access to critical technologies, and stifling innovation. Moreover, the state’s directive approach could distort market incentives, undermining private sector dynamism. Nonetheless, by expanding into Global South markets, building a unified domestic market, and coordinating capital and businesses, China aims to balance these risks while pursuing its technological and global ambitions.

By Lizzi C. Lee, Fellow on Chinese Economy, Center for China Analysis

Learn More: CCA Managing Director Jing Qian and CCA Fellow Neil Thomas discussed the centrality of new quality productive forces in the leadup to this year’s Third Plenum.