China is accelerating the consolidation of smaller, mostly rural banks to bolster its financial system amid persistent concerns over slowing economic growth. Last year, a record 670 lending institutions—representing roughly a quarter of all banks in the country—were closed as part of a government-directed consolidation, news portal CNBC reported, citing an analysis by Fitch Ratings. Authorities are seeking to create fewer, but larger and financially stronger banks capable of better withstanding potential turmoil.
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Small Banks Remain the Weakest Link in China’s Financial System
According to Fitch, small and rural commercial banks remain the weakest link in China’s financial system. The rating agency highlighted in particular their poor asset quality, low capital adequacy, and governance deficiencies, especially in less developed regions of the country.
The profitability of Chinese rural banks has deteriorated in recent years. Return on assets (ROA)—the profit banks generate relative to their total assets—dropped to 0.45 percent in the first half of the year, down from 0.56 percent in 2021. In contrast, the non-performing loan (NPL) ratio rose to 2.8 percent over the same period, compared to a banking sector average of 1.5 percent. Smaller banks carry greater exposure to risks associated with loans to small businesses, real estate developers, and local governments.
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Bank Mergers Aim to Improve Oversight Amid Economic Slowdown
According to Fitch, the mergers aim to improve financial sector supervision, curb regulatory arbitrage, and increase transparency. The agency noted that the troubles of smaller lenders should not threaten the overall financial system, as most operate within limited geographic areas and are less interconnected with other banks. However, consolidation could alter the market positioning of individual smaller institutions, while their structural problems are likely to persist in the near term, Fitch added.
The bank consolidation comes amid ongoing signs of strain in the world’s second-largest economy. China’s gross domestic product (GDP) grew by 4.3 percent in the second quarter, marking its slowest pace since 2022. Industrial profits rose by 4.2 percent in August, their weakest growth this year.
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Source: ČTK
