Recently, there has been another wave of bankruptcies among small and medium-sized banks, with the Liaoning Lianfeng Village Town Bank in Dalian entering bankruptcy proceedings. In the first half of 2025, the number of deregistered small and medium-sized banks in China has exceeded the total for the entire year of 2024. Experts believe that behind the disappearance of small and medium-sized banks lies the plight of tens of thousands of small and medium-sized enterprises.
The Liaoning Financial Regulatory Bureau’s official website issued a reply on August 8 regarding the bankruptcy of the Liaoning Jinzhou Lianfeng Village Town Bank (referred to as Lianfeng Village Town Bank), stating that they “principally agree” to allow the bank to enter bankruptcy proceedings. On the same day, the Dalian Rural Commercial Bank Co., Ltd. (Dalian Rural Commercial Bank) announced in a “Letter to Customers” on its website that deposits from the Lianfeng Village Town Bank would be taken over by the Dalian Rural Commercial Bank.
Public records show that the Lianfeng Village Town Bank officially started operations in June 2010, with the original Baoshang Bank contributing 30% of the capital as the largest shareholder in the establishment. Baoshang Bank had gone bankrupt in 2020, becoming China’s first national bank to be disposed of in bankruptcy, highlighting the real risk of bank failures in China.
During the Baoshang Bank’s bankruptcy liquidation, healthy assets were separated from liabilities and transferred to the newly established Mengshang Bank. The latest business registration information shows that Mengshang Bank currently holds a 30% stake in the Lianfeng Village Town Bank, with another 10% stake held by a state-owned enterprise in Dalian.
Although the Lianfeng Village Town Bank did not disclose specific financial data, it had previously been fined for data quality issues. The penalty information from the Dalian financial regulatory authority shows that in December 2024, the Lianfeng Village Town Bank was fined 150,000 yuan for inadequate rectification of data quality issues.
Compared to individual cases of small and medium-sized bank bankruptcies, the trend since 2024 has been the consolidation and exit of small and medium-sized banks.
In China, small and medium-sized banks refer to city commercial banks, rural commercial banks, agricultural credit cooperatives, village banks, etc., excluding state-owned commercial banks and nationwide joint-stock commercial banks. Because small and medium-sized banks primarily serve grassroots residents, small and micro-enterprises, and individual businesses, they are often referred to as the “capillaries” of the real economy.
According to official media reports, in 2020, China had more than 4,000 small and medium-sized banks, accounting for 99% of the total, with total assets accounting for about one-fourth.
In the first half of 2025, a total of 210 small and medium-sized banks nationwide were deregistered, exceeding the 204 for the entire year of 2024. In 2023, there were 77 deregistrations of small and medium-sized banks for the whole year, compared to only 43 in 2022.
On August 11, Tien Chun Institute for Political and Economic Studies researcher Song Weijun told Epoch Times, “Small and medium-sized banks are the capillaries of local economies. When small and medium-sized banks collapse, it reflects the plight of thousands of small and medium-sized enterprises behind them. The current state of banks is a manifestation of the malfunction of China’s economic growth model and the distortion of the financial system under political pressure.”
According to statistics released by the National Financial Regulatory Administration, as of December 31, 2024, China had a total of 4,295 legal entities in the banking sector, including six state-owned banks, 12 joint-stock banks, 124 city commercial banks, 1,563 rural commercial banks, 458 rural credit cooperatives, and 1,538 village banks. At the end of 2024, there were 3,683 small and medium-sized banks, with 204 deregistered that year, equivalent to 5% of small and medium-sized banks being deregistered.
The situation of small and medium-sized banks is closely related to the operations of small and medium-sized enterprises. Chinese media describe the relationship between these two as a “symbiotic” relationship.
Small and medium-sized banks are familiar with the business reputation, upstream and downstream relationships, and even the credit of the founders of enterprises in their jurisdiction, allowing them to flexibly provide loans to small and medium-sized enterprises. The operation and expansion of small and medium-sized enterprises require continuous financial support, thus small and medium-sized banks obtain a stable customer base.
However, when small and medium-sized enterprises face challenges in development, or even stop production or go bankrupt, the non-performing loan ratio of small and medium-sized banks rises, leading to a contraction in credit services. As banks tighten credit to reduce risks, it becomes more difficult for small and medium-sized enterprises to access funding, hastening their closure.
As the Chinese economy continues to decline in 2025, real estate prices continue to fall. Faced with uncertainties about the future, people are tightening their wallets and reducing consumption. A bank employee, Ms. Li, told Epoch Times, “Now everyone talks about ‘downgrading consumption.’ I no longer go to large shopping malls to buy clothes, but instead opt for small stores. Some colleagues even go to live-streaming platforms to find cheap goods, like a top for only 30 yuan, or pants for around 20 yuan. Many restaurants, hotels are closing, and many B&Bs can’t survive.”
Private enterprises in the Yangtze River Delta region have already witnessed a wave of closures. Former multi-millionaire Lu Guoping, Chairman of Suzhou Donglin Decoration Engineering Company, tearfully said in a video, “Ten years ago, my annual output was tens of millions, but now I have debts of two hundred million. Wearing a watch worth 130,000 yuan, driving a car worth 500,000 yuan, I’m now on the run.”
In the current economic environment where the overall economy is declining, state-owned large banks are gradually lowering lending conditions, causing small and medium-sized banks to suffer pressures from both the closures of small and medium-sized enterprises and the pressure from larger banks. At the same time, the CCP government also requires local areas to integrate small and medium-sized banks according to specific circumstances in the name of reducing risks.
The People’s Bank of China’s release of statistics on inclusive small and micro-enterprise loans from the banking sector showed that in the entire year of 2024 and the first quarter of 2025, the proportion of loans provided by rural financial institutions gradually decreased.
In the first quarter of 2024, the proportion of loans provided by rural financial institutions was 27.4%, which dropped to 27.2% and 26.9% in the third and fourth quarters of that year, respectively. By the first quarter of 2025, the decline worsened, with the loan proportion falling to 26.3%.
As the economy continues to slump and the business of small and medium-sized banks shrinks, can state-owned large banks surely land safely?
Not only are private enterprises impacted, but state-owned enterprises have also faced the rupture of their funding chains, resulting in closures.
For example, Anhui’s long-established state-owned enterprise, Hefei Construction Group Co., Ltd. (referred to as “Hefei Construction”), has experienced the rupture of its funding chain due to the contraction of local infrastructure investments and rising financing costs, leading to debts of billions of yuan. They have notified employees that their labor contracts will be terminated starting August 31, 2025. Additionally, state-owned enterprises in Gansu, Guizhou, Ningxia, Sichuan, and other regions have also entered liquidation proceedings.
Regarding the risks that state-owned large banks may face in China’s economic environment, Song Weijun said, “A direct and severe financial crisis like the ‘Lehman Moment’ in the U.S. is less likely to occur in China because of the ‘visible hand’ of the CCP, which compels large banks to carry out political tasks. However, risks may permeate and erode the entire banking system in a more insidious manner.”
“In fact, publicly listed large banks are also masking real data using financial means, with the most common method being ‘window dressing.’ For example, through ‘rollover’ and ‘extension’ methods, they make a loan that should have defaulted appear ‘normal’ on the books, but it is essentially self-deception.”
In the first half of 2025, the largest fine in the Chinese banking sector was imposed on the Agricultural Bank of China (referred to as AgBank), with a penalty amount of 51.6054 million yuan. The violations included customer identification, misappropriation of fiscal funds, and suspicious transactions. AgBank is one of China’s four major state-owned commercial banks and is also a listed bank, listed on the Hong Kong Stock Exchange and the Shanghai Stock Exchange in July 2010.
In 2024, AgBank received the most fines in the banking sector and had the highest cumulative fine amount, with total fines exceeding 70 million yuan for the year.