China's national auditor has publicly called out two of the country's largest state-owned banks for evading tax and making improper loans — an unusual rebuke that sent both lenders' shares lower.
What the audit found
In its annual report, China's National Audit Office said Bank of China exploited tax breaks meant for public investment funds to avoid roughly 2.37 billion yuan (about $330 million) in income tax, Bloomberg reported. According to the auditor, the bank disguised private funds as public ones through what it called a "headcount" arrangement — bank staff contributing token sums to pad the number of investors so the funds would qualify for exemptions reserved for retail-oriented public funds, Dim Sum Daily reported.
Agricultural Bank of China was cited separately. The audit office said AgBank extended about 11.1 billion yuan in loans between 2021 and 2025 to farmland projects that did not meet the standards for a government-supported "high-standard farmland" lending category, and that some of the money was diverted into wealth-management products and debt repayment rather than its intended use, Bloomberg reported.
Bloomberg noted that while the auditor turns up irregularities every year, this is the first time in recent years that a major state lender has been explicitly accused of tax evasion.
The market reaction
Both banks fell in Hong Kong trading. Bank of China dropped as much as 6.5% to around HK$4.93 — its weakest in roughly three months — and Agricultural Bank of China fell about 4.3%, according to Investing.com. The two larger state lenders, ICBC and China Construction Bank, also edged lower, and financial shares weighed on mainland indexes.
Why China's state banks matter
Bank of China, AgBank, ICBC and China Construction Bank are the "Big Four" state-owned commercial banks. Beyond their sheer size, they are the main channels through which Beijing directs credit — lending heavily into sectors the government designates as priorities, from infrastructure to agriculture. Because the state is the controlling shareholder, the banks balance commercial returns against policy goals, a dual role that has long raised questions about whether some lending is driven by directives rather than credit quality.
Those questions intensified after China's property downturn, which began with developer defaults in 2021 and left banks exposed to struggling real-estate and local-government borrowers. Official bad-loan ratios have stayed low by global standards, but outside analysts have questioned whether the reported figures fully capture stressed assets.
What it means for investors
The audit adds a layer of governance risk to a sector already grappling with thin lending margins and slower loan growth in a more moderate Chinese economy. The specific findings — a tax workaround at Bank of China and misdirected policy loans at AgBank — point to weaknesses in internal controls and in monitoring how earmarked credit is actually used. Beijing has signaled it wants tighter financial discipline, and the public naming fits a pattern of periodic accountability exercises. What investors will watch now is whether the findings bring financial penalties, management consequences or operational changes, and how China's banking regulator follows up.
