China’s cash-strapped small banks face limitatons amid shake-up, no one-size-fits-all fix

The reorganisation is intended to “coordinate and clear non-performing assets under small and medium-sized banks, clean up problem shareholders, and replenish capital from multiple sources”, the Henan government said last week.

The merger came as Beijing has called for consolidation of indebted and feeble local banks, with local-level debts presenting some of the biggest systemic risks to China’s already slowing economy.

Six provincial-level rural commercial banks in Liaoning, Shanxi, Henan, Sichuan, Guangxi and Hainan have been established since 2023 amid Beijing’s push for a clean up of regional banks.

There are also four municipal-level rural commercial banks in Beijing, Shanghai, Tianjin and Chongqing.

The National Financial Regulatory Administration said the number of registered banking and financing institutions in China fell by 77 last year, bringing the total down from 4,567 in 2022 to 4,490 at the end of last year.

And China’s banking clean up is poised to proceed with a faster momentum than the previous year, with the number of registered banking and financing institutions having already fallen by 51 since the start of the year.

As China tackles its property crisis, China’s small banks have appeared to show more vulnerability than larger banks as they are often closely connected to local governments.

However, Zhao Xijun, a professor of finance at Renmin University in Beijing, said the success of the reorganisation and mergers depended on a range of factors as local governments have the authority to restructure banks according to respective financial situations.

“There does not seem to be a plan that fits all. But in general, regions that are more economically developed and experienced in their financial operations appear to be able to find more success in such restructuring, as they have better foundations and capital for their financial institutions, so risks can be better controlled after these mergers,” he said.

“However, for local governments that are already struggling with their economies, it is hard for them to garner new capital to fund bank operations even after merging … there is even a risk that these small banks with poor finances would drag those better operating ones after such reorganisation.

“Therefore, the target from these mergers may not necessarily be met.”

A group of analysts from Moody’s Ratings shared a similar view, noting while the process of consolidation had improved credit quality as the new entities underwent disposal of impaired assets and often received fresh capital, it also increased local and central government’s expenditure at a time when there is weakened capacity to provide support.

“Regional banks are limited by the local economies they operate in because regulations restrict them from establishing branches and offering online services to clients registered outside their home provinces,” the analysts said in a report published on China’s regional banks last month.

There are 125 city commercial banks and 1,607 rural commercial banks in China’s regional banking system, which took up 24.8 per cent of total banking assets at the end of 2023, according to the report.

Over 2,100 other rural banking financial institutions, including village banks and rural credit operatives, take up between 2 to 3 per cent of the total banking system assets, the report added.