Financial stability depends not only on whether a central bank can intervene in a crisis, but also on whether markets understand the limits of that intervention. Our recent paper argues that China’s lender of last resort regime has evolved with a relatively broad scope, unclear boundaries, and close links to wider state rescue functions. This matters not only for China, but also for wider debates on how large emerging economies design credible financial safety nets.
The lender of last resort has long been a core pillar of modern financial safety nets. In its classical form, associated most famously with Bagehot, the central bank should lend freely against good collateral at a penalty rate to solvent but illiquid institutions in order to prevent systemic collapse. Although this principle has evolved over time, its basic rationale remains important: lender of last resort support is meant to preserve the stability of the financial system, not to guarantee the survival of every distressed institution.
China offers a particularly important case study. It has one of the world’s largest banking systems and several globally systemic banks (such as the ICBC, the Agricultural Bank of China, the China Construction Bank, and the Bank of China), yet its lender of last resort framework has received far less legal and economic analysis than the regimes in the United States, the United Kingdom, or the European Union. This gap is increasingly difficult to justify. China’s financial system is shaped by a distinctive political economy in which state ownership, administrative coordination, and policy-driven credit allocation remain highly significant. In such a system, the boundaries of emergency liquidity support matter greatly.
At first sight, China’s banking system appears relatively resilient. Its deposit base is comparatively stable, leverage has often appeared more conservative than in pre-2008 Western systems, and the People’s Bank of China (PBoC) has a wide range of policy instruments at its disposal. Yet financial stability is not simply a matter of aggregate balance-sheet strength. It also depends on how liquidity stress is distributed across institutions and how that stress is resolved when confidence weakens.
In China, liquidity pressures are often concentrated in smaller and medium-sized banks, especially those more dependent on interbank funding and negotiable certificates of deposit. These institutions may face sudden funding strains even where solvency is not yet in question. In this context, the design of the lender of last resort becomes central to systemic resilience.
Our paper argues, however, that China’s regime departs in important ways from the classical logic of lender of last resort support. Legally, the PBoC has been given a broader risk-prevention and crisis-management role under the leadership of the State Council than is typically seen in Western central banking frameworks. In practice, this has encouraged interventions that extend beyond solvent but illiquid institutions to distressed entities whose problems are deeper, and sometimes to risks that are not clearly systemic.
Over time, this has blurred the role of the central bank. Rather than acting only as a lender of last resort, the PBoC has increasingly been perceived as a more general financial rescuer. That shift has important implications. If emergency liquidity support is expected too readily, market discipline weakens. Banks may internalise the likelihood of state support and have fewer incentives to strengthen governance, price risk properly, and manage liquidity conservatively. Inefficient institutions may also be kept alive longer than is desirable, storing up fragility rather than reducing it.
A related problem lies in the historically uncertain boundary between lender of last resort support and depositor protection. Before the introduction of explicit deposit insurance in 2015, depositor guarantees in China were largely implicit. Even after the formal establishment of a deposit insurance regime, expectations of broad state backing have remained strong. As a result, lender of last resort tools have at times functioned, in effect, as a substitute for other parts of the financial safety net. This weakens the internal coherence of the system. Deposit insurance and lender of last resort lending should be complementary, but they should not collapse into one another.
These questions have become even more important with the proposed PRC Financial Stability Law, which seeks to consolidate China’s fragmented framework for financial risk prevention and resolution and formally recognises the PBoC’s lender of last resort function. This is a significant and timely development. But statutory recognition alone is not enough. The more fundamental challenge is to clarify when support should be triggered, on what conditions, and where its limits lie.
The central claim of our paper is therefore a normative one: a credible lender of last resort regime promotes financial stability not by maximising intervention, but by constraining it. Emergency liquidity should be temporary, conditional, and clearly tied to systemic risk. It should be distinguished from fiscal rescue, from routine institutional support, and from depositor protection. In this sense, the discipline of the lender of last resort is just as important as its availability.
We do not argue that China should simply copy Western central banking models. Its financial system operates within a distinct institutional and political context. But comparative experience does show that ambiguity in crisis intervention can itself become a source of instability. As China’s financial markets deepen and its international integration grows, the costs of such ambiguity are likely to increase.
By re-examining China’s lender of last resort regime through the lens of financial stability, our paper contributes to broader debates on how emerging economies can build effective and credible financial safety nets under conditions of scale, state involvement, and rapid institutional change. The long-term stability of a financial system depends not only on the capacity to act in crisis, but on whether everyone understands the limits of that action.
This post is based on the authors’ article, ‘Lender of Last Resort in China: Operating Mechanism, Legal Foundation, and the Financial Stability Implication’, published in the Volume 34 of Asia Pacific Law Review (2026).
Ci Ren is a Lecturer in Business Law at the School of Law, University of Leeds.
Lerong Lu is a Reader in Law at the Dickson Poon School of Law, King’s College London.
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