In recent years, there have been continuous runs and collapses in small and medium-sized banks in China, leading to mergers and reorganizations of many of these banks, showing an accelerating trend. So far this year, 50 small and medium-sized banks have merged or disappeared. The formation of rural commercial joint banks has begun in Jiangsu Province, which is seen as the latest move in this wave of mergers. Analysts believe that the Chinese Communist Party’s attempts to address the crisis are more of a temporary solution rather than tackling the root cause, thus setting up a potential disaster.
On Tuesday, September 10th, the Jiangsu Provincial Cooperative announced the approval of the “Jiangsu Rural Commercial Joint Bank Establishment Plan” and other related proposals, deciding to establish the Jiangsu Rural Commercial Joint Bank Co., Ltd. based on the Jiangsu Provincial Cooperative.
Apart from Jiangsu, reforms of provincial-level cooperatives have been completed in Zhejiang, Liaoning, Henan, Shanxi, Sichuan, Guangxi, Hainan, and other regions.
The wave of mergers among small and medium-sized banks is on the rise. The website of the China Banking and Insurance Regulatory Commission shows that local financial regulatory authorities have been approving the merger and restructuring of small and medium-sized banks, especially rural banks.
On September 9th, the Hebei Banking Regulatory Bureau approved the absorption and merger of Hannan Qilu Rural Bank, Cheng’an Qilu Rural Bank, Cixian Qilu Rural Bank, and Shenxian Qilu Rural Bank by Handan Hanshan Qilu Rural Bank, along with their assets, liabilities, businesses, and employees.
On September 2nd, the Bureau also approved Zhangjiakou Bank’s acquisition of Changli Jiayin Rural Bank, Lulong Jiayin Rural Bank, and Qinhuangdao Funing Jiayin Rural Bank. On August 19th, it approved Chengde County Hengsheng Rural Bank to absorb and merge with Pingquan Hengsheng Rural Bank.
On August 15th, the Bureau approved Zhengding Rural Commercial Bank to absorb and merge with Zanhuang Longxing Rural Bank.
On August 22nd, the Hunan Banking Regulatory Bureau approved Hunan Bank to acquire Xiangxiang City Rural Bank and establish a branch.
On July 28th, the Henan Rural Commercial Bank Formation Working Group issued an announcement about establishing Henan Rural Commercial Bank Co., Ltd., where 25 small and medium-sized bank legal entities in the province will merge to form Henan Rural Commercial Bank.
On June 21st, the Liaoning Regulatory Bureau approved Liaoning Rural Commercial Bank to absorb and merge 36 rural small banks, including Liaoning Xinmin Rural Commercial Bank.
On June 20th, the Guangdong Regulatory Bureau approved Dongguan Rural Commercial Bank to absorb and merge Huizhou Zhongkai Dongying Rural Bank and Dongguan Dalang Dongying Rural Bank.
According to a recent incomplete statistics by the Shanghai Securities Daily, the number of small and medium-sized banks merged since 2024 has exceeded 50.
On September 4th, the National Financial Supervision and Administration Bureau released a list of corporate names of banking and financial institutions. As of the end of June 2024, there are a total of 4,425 banking and financial institution corporate entities, which is 65 fewer compared to the end of the previous year, with a total decrease of 136 institutions within a year.
The China News Weekly reported that under the guidance of distorted performance evaluation, local governments have inappropriately interfered in local banking operations, leading small and medium-sized banks to be heavily tied to real estate and local financing platforms, carrying a significant amount of hidden debts.
The “Financial Stability Report of China – 2023” released by the People’s Bank of China showed that the number of high-risk banks has reached 337, with a total asset size of 6.63 trillion RMB, all of which are small and medium-sized banks.
An article by The Economist on July 4, this year, mentioned that there are approximately 3,800 small banks in rural areas of China. These banks hold assets worth 55 trillion RMB, accounting for 13% of the entire banking system. Over the years, these small banks have been poorly managed and have accumulated a large number of bad loans.
On August 27th, Handan Bank failed to sell about 24.645 million shares at a starting price of 407 million RMB in its second auction. In mid-August, Jinan Bank’s 2.77% equity interest was also unsold. On August 5th, the Hangzhou Joint Rural Commercial Bank’s approximately 31.993 million shares were unsold for the third time.
On the Ali auction platform, the starting prices for the equity of many small and medium-sized banks like Heyuan Rural Commercial Bank, Huizhou Rural Commercial Bank, Dongguan Rural Commercial Bank, and Wuhan Rural Commercial Bank have been set at around 1 RMB.
In 2023, the Chinese government’s “Government Work Report” clearly pointed out the “exposure of risks in some small and medium-sized financial institutions.” The official stance of the Chinese Communist Party has repeatedly emphasized the importance of maintaining the bottom line to prevent systemic risks.
In 2022, a widespread fraud case occurred in Henan Rural Banks, leading to several banks freezing depositors’ withdrawals, sparking continuous protests from depositors. In 2020, Baoshang Bank went bankrupt, with its controlling shareholder Tomorrow Holding misappropriating 156 billion RMB, which all turned into bad loans for the bank.
The Economist predicts that the Chinese government will accelerate the pace of absorbing and merging small banks in the future. According to Standard & Poor’s Global ratings agency, it will take about ten years to complete the consolidation process.
Analysts believe that apart from the chronic issues accumulated over the years, the ongoing real estate crisis in China is making it even harder for local small and medium-sized banks. To stimulate the real estate market, the Chinese central bank has reduced mortgage rates, leading to a narrowing of net interest margins and weakening of bank profitability.
Moreover, there is a growing willingness among residents to repay loans early, resulting in a significant reduction in individual mortgage loans. In the past few years, to compete with larger banks and attract depositors, small and medium-sized banks have introduced high-interest financial products, with much of the funds flowing into the real estate market. Now that real estate companies are deeply mired in debt crises, one after another, many loans have turned into bad debts. The small scale and low risk resistance of small and medium-sized banks have increased the operating pressures, putting many on the brink of runs and collapses.
After the mergers and reorganizations, turning these small and medium-sized banks into a unified entity provides some relief to the better-operated banks at the expense of the struggling ones to prevent immediate collapses of high-risk small banks. However, this approach is not a permanent solution to the inherent weaknesses in small and medium-sized banks, only delaying the inevitable. When the day of the full-blown crisis arrives, it may well trigger a systemic financial crisis with no remedy in sight.
Many netizens have also seen through the real intentions of the Chinese Communist Party.
“Private banks and insurance companies are in chaos and can hardly sustain themselves, so they use reform as an excuse to merge, dismantle, and close down.”
“The main reason for the merger of small and medium-sized banks is that these troubled banks are at the edge of runs, and further delays could lead to greater consequences.”
“They can establish a bank, and within a few years after making enough money, they go bankrupt. But they dare not blatantly default on deposits held by ordinary people, so they let upstream banks acquire them. In that case, how are bad debts dealt with?”