China’s efforts to consolidate its smaller banks have intensified, as the government seeks to mitigate systemic risks posed by these institutions. Small and regional banks, with weak funding profiles and higher risk appetites, are particularly vulnerable to issues such as risky lending practices and poor governance. A total of 162 small banks were merged, dissolved, or deregistered in 2024—a significant increase compared to previous years, as regulators target reducing the risks these banks pose.
Pressure on Small Banks
Smaller banks have long been exposed to risky sectors, especially property development, and government financing platforms. As China’s economy faces challenges, such as slower growth and weakening government finances, these banks are under increasing pressure. “We expect small regional banks to face more asset quality deterioration in the coming years,” said Elaine Xu, a director at Fitch Ratings, highlighting the heightened challenges ahead.
While the smaller banks account for a significant portion of the country’s banking institutions, they control just a fraction of the total assets—around a quarter of the sector. The small banks’ limited scale makes them more prone to operational difficulties, which have contributed to instability in the past.
Risk and Consolidation Challenges
Rural banks, particularly at the village level, face the highest levels of risk. These banks emerged to support rural development but have often struggled with poor governance and insufficient capital. The collapse of Baoshang Bank in 2019 underscored the vulnerabilities in this sector, as weak governance allowed significant financial mismanagement.
Despite the consolidation efforts, experts like Ryan Tsang from S&P Global Ratings warn that simply restructuring or replacing individuals at struggling banks may not resolve the deeper-rooted issues. True reform will require significant improvements in governance and operational structures.
Long-Term Risks and Reforms
The People’s Bank of China (PBOC) has emphasized accelerating efforts to reform these institutions, with a focus on high-risk provinces. Local governments are attempting to provide capital support, but some face financial constraints due to declining revenues from the property sector and reduced land sales. The central government aims to prevent systemic collapse but acknowledges that challenges will persist.
Nicholas Zhu from Moody’s highlights that while the consolidation may help ease regulatory pressure, mergers alone may not solve the long-standing problems. Experts believe that addressing the governance culture and business models of these smaller banks will take time and effort.
Conclusion: Ongoing Risks with a Stabilizing Focus
While the consolidation of small banks in China may provide some relief, the risks associated with weak governance and poor asset quality remain significant. China’s authorities are focusing on maintaining financial stability, but it will likely take years to implement lasting reforms and rebuild confidence in the sector. As smaller banks continue to face challenges, the potential for localized financial disruptions remains, but analysts do not foresee these risks escalating into systemic crises in the short term.
Related Topics:
UBS Solidifies Global Leadership in Sustainable Finance
Aegis Logistics Stock Jumps 3.94%, Outperforms Sector by 3.21%
