China’s economic growth continues to slow down, with weak demand for credit. To prevent the impact of liquidity crises in smaller lending institutions on the financial system, the Chinese authorities have reduced the total number of banks by nearly a quarter.
According to a report by the Financial Times on October 4, the total assets of the massive government-controlled banking system in China amount to around $64 trillion, and regional integration is currently underway.
According to data from China’s National Financial Regulatory Authority (NFRA), in 2025, over 670 banking institutions were closed, marking a record number of closures, with the vast majority located in rural areas. The rating agency Fitch released a report stating that following the closure of these banks, the total number of bank entities in China has decreased to 3,139 as of 2025, representing a 23% drop over the past four years.
With the real estate market stagnating, low-interest rates, and monetary tightening putting pressure on banks’ profits, the banking sector consolidation aims to “simplify regulation” and “eliminate the potential risks of liquidity events in small financial institutions,” as stated by Jason Bedford, a senior visiting researcher at the East Asian Institute of the National University of Singapore, cited by the Financial Times.
“We have never seen such a large-scale consolidation before,” Bedford said.
Fitch noted that small banks in China (mainly rural and urban-level banks, especially in underdeveloped areas) remain the weakest link in the entire banking system, characterized by poor asset quality, low capital levels, and governance issues.
Rural and regional urban banks collectively hold over a quarter of China’s banking industry assets.
In addition to rural banks, urban-level banks are also under close scrutiny. In July of this year, the NFRA, in conjunction with the Hubei provincial government, took over the troubled Wuhan Z-Bank due to severe credit risks. This is the second time since the 2019 event with Inner Mongolia’s Baoshang Bank that such a bank takeover has occurred.
Moody’s stated that this “highlights the challenges faced by weaker regional institutions.” As regulatory authorities seek to mitigate the risk posed by smaller and weaker regional institutions, the trend towards consolidation is expected to continue.
Nicholas Zhu, Moody’s vice president, cited by the Financial Times, said, “The entire banking system—and not just rural banks—is facing the challenge of China’s low-interest rate environment.”
The consolidation of rural banks is taking place against the backdrop of changing macroeconomic conditions in China, most notably the reversal of the real estate boom since 2021. In recent years, China’s economic slowdown and a downturn in the real estate market have pushed many businesses into financial hardship, with some companies struggling to generate enough profits to service their debts, leading banks to face increasing pressure from non-performing loans.
An article by Bloomberg in May of this year mentioned that China’s $3 trillion in hidden non-performing loans would only prolong the economic downturn. Entrepreneurs like Tom Hu, managing a plastic business in China, find themselves unable to repay loans, exacerbating the economic challenges.
“To be honest, the economic situation feels like it’s getting worse,” Hu said, with many other businesses also grappling with financial difficulties. “I don’t want to end up on a credit blacklist, and banks don’t want to see an increase in bad loans.”
Instances like Hu’s situation are playing out across various regions in China, while banks are struggling to cope with the mounting levels of non-performing loans. Although the true extent of non-performing loans is difficult to ascertain, most economists believe the non-performing loan ratio is much higher than the official Chinese government figure of 1.5%. An analyst from London’s Absolute Strategy Research estimated this ratio to be around 10%, indicating that up to $3 trillion in loans should be classified as non-performing but currently are not. Other analysts suggest that the actual amount of non-performing loans could be twice as much.
Hu’s circumstances should have been classified as non-performing loans. Operating in Zhejiang, his company has been hollowed out, with weak domestic demand and export fluctuations forcing him to lay off 90% of his employees. Since the reopening after the end of the pandemic in late 2022, his plastic factory has been teetering on the edge of insolvency, with generated cash only sustaining basic operations.