China’s efforts to strengthen its small banks have resulted in a sharp decline in their numbers.
A total of 162 small banks merged, dissolved or filed for bankruptcy in 2024 – more than four times the number recorded in 2023 and seven times the number recorded in 2022, according to data from corporate risk tracker Qiye Yujingtong. The country has about 4,000 banks.
“Smaller regional banks typically have poor funding profiles and high appetite,” said Elaine Shu, Asia-Pacific director of financial institutions at Fitch Ratings. “This has increased their exposure to risky sectors, including property development.”
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The merger aims to reduce exposure to government funding platforms, analysts said. However, the effort is facing several challenges, from the economic slowdown to the weakening of the government’s financial capacity, he added.
Zhao Zijun, a finance professor at Renmin University in Beijing, said the banking sector is facing pressure on revenue and profitability. “This pressure is particularly pronounced for small and medium-sized banks,” Zhao said.
Analysts expect the problems to continue.
“We expect that small regional banks will face significant asset quality deterioration in the coming years, in addition to pressures on their income and profitability,” he said.
China is divided into small and medium-sized banks from policy banks, major state-owned banks, and major joint-stock banks. In the year By the end of 2023, China will have 3,912 such banks and rural credit cooperatives, according to the latest Financial Stability Report. People’s Bank of China (PBOC). Despite their large numbers, they are relatively small in size, accounting for a quarter of the total assets of the country’s banking institutions.
Demonstrators protest against a cut in rural bank deposits in Zhengzhou, Henan province, July 10, 2022. Video obtained by Reuters. Photo: Reuters alt= Demonstrators protest a freeze on deposits at rural banks in Zhengzhou, Henan province, July 10, 2022. This image is taken from a video provided to Reuters. Photo: Reuters>
In the year In 2019, Baoshang Bank in Inner Mongolia, the supervisory team of tomorrow, He used poor management 156 billion yuan ($21.3 billion) in unpaid loans for fraud.
Rural banks, especially at the village level, face the greatest risk.
These banks, which make up most of the 357 banks the PBOC has labeled as high risk, emerged two decades ago as part of Beijing’s push to support rural development. In the year By the end of 2023, China had 1,636 village banks, accounting for less than 1 percent of total banking sector assets, according to PBOC. Each bank holds an average of about 1.4 billion yuan in assets. The banks are often controlled by a variety of minority shareholders, which include local rural banks, local state-owned enterprises, and private firms.
In the year In April 2022, depositors were denied access to their accounts at several rural banks in central China’s Henan and Anhui provinces, prompting many to protest against local banking authorities.
Beijing is trying to reduce the risk to smaller banks by allowing local governments to issue special bonds, allowing large banks to merge with smaller banks.
The PBOC said in its stability report that it will accelerate efforts to improve small banks in high-risk regions.
“This shows the government’s focus on maintaining financial stability,” said Nicholas Zhu, banking analyst at Moody’s Ratings. “The central government and local governments do not want to see systemic banking failure.”
However, some local governments may not be able to provide additional funding to these banks to shore up their capital, as revenues have declined in recent years due to property destruction and falling land sales, said Zhao of Renmin University.
A villager works on soybean production in Lanxi City, Zhejiang Province, China, December 5, 2024. Photo: Xinhua>
Consolidation among small banks can ease the regulatory burden, allowing the watchdog to better focus its resources on the internal control and management of small banks, Xu with Fitch Ratings. “However, (mergers and acquisitions) alone cannot solve the risks facing small banks in a sustainable manner, as challenges still face the surviving entities,” she added.
“Chinese authorities have accelerated the reform of rural financial institutions by 2024, and we expect the reform process to accelerate further this year,” said Ryan Tang, managing director of S&P Global Ratings in Hong Kong. They can be corrected or improved. Replacing a few individuals or restructuring processes is not enough to solve chronic problems.”
“It’s not an overnight success,” he said, as it takes time to build a strong corporate governance culture.
“You occasionally see negative headlines in different regions,” said Dong Chen, head of Asia research at Picket Group in Hong Kong. “That wouldn’t be surprising. But I don’t expect it to turn into a systemic risk.”
However, Zhao of Renmin University believes there are risks.
“It’s about confidence.” “Once a financial institution experiences risks, those risks can spread and spread from one institution to another.”
