As of the past week until June 24th, 40 small banks in China have disappeared, either absorbed by larger banks or dissolved. This is related to factors such as rapid loan growth, weak risk control, and a sluggish real estate market in the past, raising concerns about signs of trouble in the financial system.
In particular, Liaoning Rural Commercial Bank has been approved to absorb and merge 36 rural small banks; Minsheng Bank acquired 1 village bank and established branch institutions; and Dongguan Rural Commercial Bank absorbed and merged 2 village banks.
According to mainland media reports, industry experts predict that by the end of 2024, the number of independent legal entities in the banking industry will further decrease, with a majority of exiting institutions being small and medium-sized rural commercial banks and village banks.
The latest article from The Economist states that even during the most severe credit crises, Chinese banks have never disappeared at such a rapid pace before.
For years, the Chinese Communist Party regulatory authorities have been implementing various so-called difficult reforms and integrations. Since 2019, several medium-sized banks have collapsed one after another, but the most complex and problematic ones are still the rural small banks.
Approximately 3,800 such small banks are scattered in rural areas of China. They hold assets worth 55 trillion yuan (7.5 trillion US dollars), accounting for 13% of the entire banking system, and these small banks have long been plagued by poor management issues, accumulating a large amount of non-performing loans.
Many small banks have lent to real estate developers and local governments, exposing themselves to the Chinese real estate crisis. In recent years, some small banks have disclosed that 40% of their books are non-performing loans.
“Cleaning up this mess is an extremely tricky task. Many banks were established to serve small businesses, especially in the poorest areas of China. Banks mired in toxic debts are now struggling to provide new loans to businesses, which in turn could harm vulnerable enterprises and local economic growth,” the report said.
What concerns the Chinese Communist Party the most is that the closure of poorly performing small banks could threaten social stability. A massive fraud case in a Henan rural bank led to several banks freezing depositor withdrawals in 2022, ultimately forcing depositors to take to the streets to demand a resolution. Authorities subsequently dispatched police to maintain stability and arrest depositors seeking justice.
The Economist predicts that the speed of the CCP’s absorption and merger of small banks will further accelerate.
According to the estimates of rating agency S&P Global, this project merger would take ten years to complete. However, it is often not the case in China. The CCP does not allow banks to go bankrupt and exit the market. In June, a legislative session in Beijing proposed a draft law called the “Financial Stability Law”, but it was delayed again.
“This incompetence is now common in Chinese policy-making. As economic growth further slows down, technocrats need to do more than just wave a wand to solve the underlying problems of the banking system,” the report said.
Online, supporters of merging small banks argue that the fewer smaller banks there are, the easier it is for regulatory authorities to supervise. Critics, however, believe this is just a smokescreen. They argue that merging tens of banks with bad debts will only create larger, worse banks.
On the Chinese social media platform WeChat, someone commented on the news of 40 small banks merging in a week, asking, “Is the storm coming?”
A financial self-media commentator mentioned that the banking market is accelerating its clean-up process.
“While banks are hiring debt collectors, small banks are busy dissolving. Over 30 banks were merged and dissolved in a month. The former may indicate that there are more people not repaying their debts, while the latter shows that banks’ bad debts are increasing,” the self-media commentator analyzed.