China is stepping up efforts to consolidate its smaller and predominantly rural banks as authorities seek to strengthen the country’s financial system amid signs of a slowing economy.
A record 670 lenders were shut down in China in 2025, representing about a quarter of the country’s banks, according to an analysis by Fitch Ratings. The closures formed part of a government-backed push to merge smaller institutions and create fewer banks with stronger capital positions.
Fitch described small and rural commercial banks as “the weakest part of the system” in China, citing concerns over asset quality, capital levels and corporate governance, particularly among lenders operating in less-developed parts of the country.
The rating agency said the financial performance of rural banks had also deteriorated. Their return on assets fell to 0.45 per cent in the first half of the year, compared with 0.56 per cent in 2021.
At the same time, non-performing loans among rural lenders climbed to 2.8 per cent during the period. That was significantly higher than the 1.5 per cent average recorded across the wider banking sector.
Fitch said the smaller lenders have greater exposure to financially vulnerable borrowers, including small businesses, property developers and local government financing vehicles.
The consolidation programme is intended to strengthen supervision of the sector while reducing opportunities for regulatory arbitrage and improving transparency, Fitch said.
Despite the weaknesses, the rating agency does not expect problems at smaller banks to trigger widespread instability across China’s financial system. It pointed to the lenders’ largely localised operations and relatively limited exposure to other banks.
Fitch said the restructuring could “ultimately reshape competitive dynamics among smaller lenders, although their structural weaknesses may persist in the near term.”
The banking overhaul comes as China continues to face economic pressures. Gross domestic product expanded by 4.3 per cent in the second quarter, marking the country’s slowest quarterly growth rate since 2022.
Industrial profits have also weakened, with growth of 4.2 per cent year-on-year in August, the slowest pace recorded so far this year.
The latest consolidation therefore forms part of Beijing’s broader efforts to address vulnerabilities within the financial sector while supporting stability in the world’s second-largest economy.
