China’s small bank mergers shrink sector but raise financial risks
Dec 12 (Reuters) – Many of China’s newly merged small banks have seen profits fall and capital buffers shrink over the past year, a Reuters review of data showed, testing Beijing’s record consolidation drive designed to avert risks in its $8 trillion small banking sector.
China’s bank consolidation has accelerated, with at least 350 banking licences cancelled in 2025 as of November, up from 198 in 2024, according to a report by Chinese investment bank China International Capital Corp.
The consolidation mainly targets a sprawling network of more than 3,600 rural banks and credit cooperatives that account for about 14% of the country’s $58 trillion banking sector, according to official data.
These small banks are mainly backed by indebted provincial governments and are largely funded via short-term money market and interbank borrowings, potentially jeopardising domestic financial stability in the event some of them fail.
A Reuters review of publicly available financial reports shows among 20 small-sized regional banks that absorbed smaller troubled lenders in 2024, 13 reported either lower profit growth, a profit decline or losses through mid-2025.
Fourteen saw their capital adequacy ratios deteriorate post-merger, the data showed.
The data review highlights the challenges Beijing faces in bolstering the balance sheets of its unwieldy small banks, most of which have been reeling from a property sector liquidity crisis and slowing economic growth.
“Unless bad debts are recognised and written off, mergers and acquisitions alone cannot reduce the number of bad debts – they can only dilute bad debt risk,” said Xiaoxi Zhang, China finance analyst at Gavekal Dragonomics.
“Local banks generally belong to local governments, so if the merged and restructured bank still cannot absorb the bad debts, it’s highly likely that the local government will provide rescue assistance again,” she said.
The People’s Bank of China declined to comment. China’s financial regulator, the National Financial Regulatory Administration (NFRA), did not respond to a request for comment.
WEAK LINK IN FINANCIAL STABILITY
China will “steadily and systematically promote mergers and reorganisations of small and medium-sized financial institutions while reducing quantity and improving quality,” NFRA head Li Yunze said at a financial conference in October.
At least 290 rural Chinese banks and rural cooperatives were merged into larger regional lenders in 2024, Reuters reported in February based on calculations of regulatory and company filings over the preceding 12 months.
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