China is stepping up efforts to consolidate smaller, mostly rural banks as authorities seek to strengthen the country’s financial system amid concerns over a slowing economy.
A record 670 lenders were shut down in 2025, representing about a quarter of China’s banks, as policymakers accelerated mergers and dissolutions aimed at creating fewer, larger and better-capitalised institutions, according to an analysis by Fitch Ratings.
Fitch said small and rural commercial banks “remain the weakest part of the system”, citing poor asset quality, low capitalisation and governance weaknesses, particularly among lenders operating in less-developed parts of the country.
Fitch said the return on assets at rural banks fell to 0.45 per cent in the first half of the year, from 0.56 per cent in 2021.
Non-performing loans at the lenders also increased to 2.8 per cent during the period, above the banking sector average of 1.5 per cent.
Fitch attributed the higher risk partly to rural banks’ greater exposure to smaller companies, property developers and local government financing vehicles.
According to the rating agency, the consolidation drive is intended to strengthen oversight, reduce regulatory arbitrage and improve transparency across the sector.
However, Fitch said problems at smaller lenders were unlikely to trigger wider financial contagion, citing their largely localised operations and limited exposure to the interbank market.
Fitch added that the measures could “ultimately reshape competitive dynamics among smaller lenders”, although structural weaknesses in the sector may persist in the near term.
The consolidation drive comes as China’s economy continues to show signs of strain, raising concerns over the financial health of smaller lenders and their ability to withstand prolonged economic pressures.
