China’s consolidation of small banks accelerates to head off systemic risk

China’s efforts to consolidate its small banks have led to a sharp reduction in their numbers as regulators work to reduce the potential for systemic risk from these institutions, which are often vulnerable to poor operations or exposure to risky lending.

A total of 162 small banks were merged, dissolved, or deregistered in 2024 – more than four times the number in 2023 and seven times greater than the tally in 2022, according to data from Qiye Yujingtong, a platform that tracks corporate risks. The country has about 4,000 such banks.

“Small regional banks typically have weaker funding profiles and higher risk appetite,” said Elaine Xu, director of Asia-Pacific financial institutions at Fitch Ratings. “This has translated into their higher exposure to risky sectors including property development.”

The consolidation also aims to reduce risk from exposure to government financing platforms, analysts said. However, the effort is encountering multiple challenges, from a slowing economy to weakening government finances, they added.

The banking sector is under pressure in terms of revenue and profitability amid the slowing economy, according to Zhao Xijun, a professor of finance at Renmin University in Beijing. “This pressure is especially pronounced for small and medium-sized banks,” Zhao said.

Analysts expect the issues to persist.