The Digital Transformation of Chinese Commercial Banks: A Catalyst for Liquidity Creation

Revolutionizing Liquidity: How Digitalization is Shaping China's Banking Landscape

China's financial landscape is undergoing a seismic shift. The rise of digital technology is transforming the way banks operate, impacting their ability to generate liquidity – the lifeblood of a healthy economy. A recent study, published in PLoS ONE, delves into this dynamic, exploring how digital transformation is reshaping liquidity creation in 127 Chinese commercial banks between 2010 and 2021.

This research comes at a critical time. China's economy is facing headwinds, with a decline in the real economy function of financial services. The need for banks to effectively channel funds to businesses and individuals has never been greater.

Unlocking Liquidity: The Power of Digital Transformation

The study's findings are compelling. Digital transformation is significantly boosting liquidity creation in Chinese banks. By leveraging big data, AI, and other digital tools, banks are becoming more efficient and effective in managing their assets and liabilities. This leads to a greater capacity to lend and support economic activity.

“Accelerating digital transformation has become an unavoidable strategy for commercial banks to improve quality and efficiency and effectively support the real economy.”

The Three Pillars of Digital Liquidity Creation

The research identifies three key pathways through which digitalization fuels liquidity creation:

• Optimized Loan Loss Provisioning: Digital tools enable banks to better assess and monitor credit risk, leading to more accurate and efficient loan loss provisioning. This frees up capital for lending and boosts liquidity.
• Enhanced Risk Tolerance: By leveraging data analytics and AI, banks gain a clearer understanding of risk, allowing them to make more informed lending decisions and increase their risk appetite within manageable bounds. This further contributes to greater liquidity.
• Mitigating Financial Disintermediation: Digital transformation allows banks to compete more effectively with emerging digital financial platforms, drawing funds back into traditional banking channels. This strengthens the foundation for liquidity creation.

The Context Matters: A Varied Impact

Interestingly, the study reveals that the impact of digital transformation varies depending on the bank's operating environment. Banks in regions with well-developed digital infrastructure and less competition from fintech companies see the greatest benefits. Internally, banks with greater resources, such as large state-owned banks, are better positioned to capitalize on the advantages of digitalization.

Charting a Course for the Future: Policy Implications

These findings offer valuable insights for policymakers. Encouraging and supporting digital transformation in the banking sector is crucial for fostering economic growth. Policies that promote the integration of fintech with traditional banking, along with targeted support for smaller banks and less developed regions, can unlock the full potential of digital liquidity creation.

The study underscores the transformative power of digital technology in China's banking sector. By embracing digitalization, banks can play a pivotal role in supporting the real economy and driving future prosperity.

Citation: Wen W, Liang Y (2025) Digital transformation and liquidity creation in commercial banks: Evidence from the Chinese banking industry. PLoS ONE 20(2): e0318785. https://doi.org/10.1371/journal.pone.0318785