China accelerates rural bank consolidation to shore up financial system

China is accelerating its consolidation of smaller, mostly rural banks in a bid to shore up its financial system, amid ongoing concerns over an economic slowdown in the country.

Beijing's policy-led consolidation saw a record 670 lenders closed in 2025 — about one-quarter of banks in the country — as authorities ramped up mergers and dissolutions to create fewer, larger and better-capitalized institutions, according to Fitch Ratings analysis.

Small and rural commercial banks "remain the weakest part of the system" in China, Fitch said in a report, which flagged their "poor asset quality, low capitalization and governance shortcomings," especially in less-developed regions of the country.

The rating agency said the return on assets among rural banks fell to 0.45% in the first half, down from 0.56% in 2021. Meanwhile, non-performing loans among such lenders rose to 2.8% in the same period, ahead of the sector average of 1.5%, with greater exposure to smaller companies, property developers and local government funding vehicles.

The consolidation push is aimed at boosting oversight, curbing regulatory arbitrage and improving transparency, Fitch said, noting that stress at smaller lenders is unlikely to lead to system-wide contagion, pointing to their largely localized operations and limited interbank exposure.

The measures could "ultimately reshape competitive dynamics among smaller lenders, although their structural weaknesses may persist in the near term," the rating agency added.

The move comes amid ongoing signs of strain in the world's second-largest economy.