China witnessed its largest wave of rural bank mergers last year, according to a Reuters analysis of official data. Yet, analysts caution that Beijing's efforts to address risks in the small banking sector might lead to further challenges in the future.
Around 4,000 small Chinese banks, often reliant on short-term funding and support from indebted provincial governments, pose a threat to financial stability if some were to fail amid slowing loan growth and rising bad debts.
In 2024, approximately 290 rural Chinese banks and cooperatives merged into larger regional lenders, underscoring the depth of issues in this vital segment of China's financial industry.
The consolidation marks the most extensive restructuring since the early 2000s when China transformed small rural commercial banks into entities serving farmers and small businesses.
The rural banking sector in China, comprising about 3,700 firms with assets totaling $7.8 trillion, is significantly large, although concerns persist regarding the financial health of many smaller lenders.
Despite efforts to strengthen the banking system post-economic slowdown, some mergers may result in "larger troubled banks," as explained by industry expert Jason Bedford.
The rural commercial banks' bad loan ratio climbed to 3.04% in 2023, nearly double the sector's average, indicating the challenges many institutions face due to exposure to risky lending practices.
In a notable example, Liaoning Rural Commercial Bank was formed in September 2023 by absorbing struggling local lenders grappling with high levels of bad loans, exemplified by Liaoning Dengta Rural Commercial Bank's troubling 21.54% bad loan ratio.
The wave of consolidations aims to reform and revitalize the rural banking sector, aligning with Chinese authorities' broader efforts to address issues that have plagued smaller lenders in recent years.
Despite the potential benefits of creating larger institutions that are more manageable for regulators, challenges such as bad assets are expected to persist, raising concerns about the longevity of these consolidation efforts.