China closes hundreds of banks to bolster financial system
More than 670 lenders, a record, shut down last year as Fitch says smaller players remain sector’s weakest part
Thomas Hale in Shanghai and William Sandlund in Hong Kong October 4 2026 2:00 am
China has reduced the total number of banks by nearly a quarter as part of a drive to strengthen oversight of smaller lenders at a time of slower economic momentum.
Regional consolidation within China’s vast state-controlled banking system, with some $64tn in overall assets, comes amid signs of sluggish demand for credit in the world’s second-largest economy.
There were more than 670 closures of banking entities last year — a record high — according to official data from the National Financial Regulatory Administration.
Almost all were in rural areas.
The closures mean the number of entities has fallen to 3,139, down 23 per cent in the four years to 2025, the rating agency Fitch said in a report based on NFRA data.
Low rates and deflation in China have also put pressure on bank profits in the shadow of a prolonged property slowdown.
Banking consolidation was about “regulatory simplification” and “eliminating the potential for liquidity events among small institutions”, said Jason Bedford, a senior visiting research fellow at the East Asian Institute, National University of Singapore.
“We’ve never seen consolidations on this scale before.”
Fitch said that small banks in China, mainly at the rural and city level, “remain the weakest part of the system, with poor asset quality, low capitalisation and governance shortcomings, especially in less-developed regions”.
The rise in mergers and dissolutions — when liabilities are also taken over by another lender — should “tighten oversight”, the rating agency said.
The NFRA did not respond to a request for comment.
Rural and regional city-level banks, which are often defined according to the level of administrative government they fall under, collectively account for more than a quarter of China’s banking assets.
While rural lenders account for almost all the recent bank closures, city-level banks have also come under close scrutiny.
In July, authorities in the central Chinese city of Wuhan took over struggling Z-Bank — the first takeover of its kind since the 2019 takeover of Baoshang Bank in Inner Mongolia.
Z-Bank, which had Rmb124bn of assets at the end of 2024 according to Moody’s, was absorbed by fellow Wuhan lender Hankou Bank.
Moody’s said the move “exemplifies the challenge facing weaker regional institutions”.
The rating agency added it expected consolidation to continue as regulators “seek to address risks at smaller and weaker regional institutions”.
Net interest margins — the difference between interest on savings compared with loans — at China’s biggest banks have come under pressure in recent years.
Authorities in September unveiled a $54bn capital increase for insurers as well as ICBC and Agricultural Bank of China, two of its biggest banks.
It followed a move last year to inject close to $70bn into four more of the country’s biggest state-owned banks through share sales.
Karen Wu, an analyst at credit consultancy CreditSights, part of Fitch, is optimistic about the prospects of China’s large banks but said that smaller lenders were more vulnerable given their weaker net interest margins.
“For these smaller banks you have to do this consolidation,” she said.
“You have to either ask the large banks to consolidate the smaller banks, or you guide the local government to inject equity into these smaller players.
You have to avoid any type of disturbance to the financial market and depositors’ confidence.”
The rural bank overhaul has come alongside a shift in China’s overarching economic conditions, most clearly demarcated by the reversal of a property boom since 2021.
The People’s Bank of China publishes data on what it calls “total social financing” that has shown continued growth in overall credit — including government bonds — at a slower pace than previous years.
The metric has also shown rare outright declines in new yuan loans, in both April and July this year.
“Given the deleveraging of households across China, mainly mortgages, the banks now lend more to the corporates,” said Nicholas Zhu, a vice-president at Moody’s.
He added that the shift in lending was a “concern” for Moody’s but in the rating agency’s view “does not rise up to a systemic concern for the whole banking system”.
Regional concerns were clearly embodied in the 2019 run on Baoshang Bank, which was backed by the now-jailed billionaire Xiao Jianhua.
Bedford said the incident was a “Rubicon-type event” in China’s banking sector.
He added that rural consolidation has often excluded the worst banks.
Inner Mongolia now has just 12 banks, down from well over 100, following last year’s consolidation under the Inner Mongolia Rural Commercial Bank.
Consolidation would reduce the number of “liquidity events . . . you now have to worry about”, he said, adding that in the 2000s “we never worried about liquidity risk”.
In the city of Shenyang, Liaoning province, Shengjing Bank has consolidated other lenders, including one visited by the FT that had various low savings rates on display.
The bank now provides mortgages from a single branch, a staff member said.
Shengjing did not respond to a request for comment.
China’s policy rates, the one- and five-year loan prime rates, are being closely watched for further easing this year after weak monthly economic data.
“The whole banking system — not just the rural banks — is facing the low interest-rate environment in China,” said Zhu.
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