China closed 670 financial institutions in 2025, a record number equivalent to about a quarter of the country’s banks, as authorities stepped up mergers and liquidations to create fewer, larger and better-capitalized institutions, according to an analysis by Fitch Ratings.
Rural banks are the weakest link
Fitch said small commercial and rural banks “remain the weakest link in China’s financial system,” citing “weak asset quality, low capital levels and governance deficiencies,” particularly in the country’s less-developed regions.
The return on assets at rural banks fell to 0.45% in the first half of the year, from 0.56% in 2021. Over the same period, the non-performing loan ratio rose to 2.8%, exceeding the sector average of 1.5%.
The agency attributed the rise in non-performing loans to rural banks’ exposure to small companies, property developers and local government financing vehicles.
Tightening oversight and narrowing regulatory disparities
The consolidation drive is intended to strengthen oversight, curb the exploitation of regulatory disparities, known as regulatory arbitrage, and improve transparency. Fitch said it did not expect the pressures facing small banks to spread across the banking system as a whole, because their operations are largely concentrated locally and their reciprocal exposure to other banks is limited.
may ultimately reshape competitive dynamics among small banks, although their structural weaknesses may persist in the near term
Economic growth slows
China’s gross domestic product grew by 4.3% in the second quarter, its slowest growth rate since 2022, while industrial profits rose 4.2% year on year in August, the weakest pace so far this year.
