(Reuters) – China experienced the greatest wave of consolidation of rural banks in its history in 2024, according to an examination of official data carried out by Reuters, but analysts fear that Beijing efforts to reduce risks in the sector will end up creating more problems ultimately.

At least 290 Chinese rural banks and cooperatives merged in 2024 with larger regional establishments according to the calculations carried out by Reuters on the basis of regulatory documents and business declarations in the last 12 months, highlighting the problems of the Chinese financial sector.

Most of the 4,000 small Chinese banks are supported by indebted provincial governments and are largely funded by short -term loans on the money market and interbank, which could jeopardize financial stability in the event of bankruptcy of some of they.

Above all, these small banks have been hardly affected by the slowdown in loans growth and the rowing of questionable claims in the context of a crisis in the real estate sector and a prolonged slowdown in the Chinese economy.

This is the most important consolidation since small Chinese rural commercial banks were transformed, at the beginning of 2000, into rural socialist style cooperatives to serve farmers and small businesses neglected by large banks of ‘State.

The rural or small banking sector of China has approximately 3,700 companies representing 57,000 billion yuan (7,800 billion dollars) of assets at the end of June of last year, or about a third of the size of the American banking sector.

“After years of cleaning, the banking system is in relatively good health despite the country’s economic slowdown,” said Jason Bedford, a former Asian analyst at Bridgewater and UBS. “However, these mergers often only create ‘greater banks in difficulty’ by combining insolvent institutions.”

The Chinese banking regulator, the national financial regulatory authority, did not respond to the request for comments from Reuters.

The merger campaign for small banks is one of the reforms launched by the Chinese authorities in 2022 to reorganize the rural banking sector and clean up small lenders in difficulty, after a series of scandals which, in certain cases, led to demonstrations.

Doubted receivables and cash machines

Over the past decade, many small banks have started to attribute to real estate promoters and local authorities’ financing organizations, making them vulnerable to post-Cavid economic recession, upheavals of the real estate market and weakening the finances of local governments.

The rate of questionable receivables of rural commercial banks thus reached 3.04% in the third quarter of last year, that is almost double the rate of 1.56% of the entire banking sector, according to the latest official data.

The government of the province of Liaoning, in northeast China, for example created in September 2023 the Rural Commercial Bank, with a share capital of 20.8 billion yuan, which then absorbed 36 small Local rural lenders in June 2024, most of which recorded a sharp increase in irrevocable loans, according to documents consulted by Reuters.

The results of the Rural Commercial Bank Liaoning has not yet been made public and the bank has not responded to a comment request.

In the same province, ten other small banks should be merged into the Liaoshen Bank, created in June 2021 to absorb 12 small regional lenders, according to official information consulted by Reuters. But the Liaoshen Bank has already inherited a large number of dubious assets following the acquisition of two smaller banks, which means that its questionable receivable ratio reached 4.67% in 2022 and 4.53% in 2023, significantly higher than the average of 1.75% of the city’s commercial banks.

“The two initial banks had insufficient quality assets, important liabilities with high interest, an unbalanced commercial structure and low operational management,” said Liaoshen Bank, which did not respond to a comment request, in its 2022 annual report.

Certain rural institutions have become the “cash machines” of shareholders and have moved away from their mission of support for the agricultural sector and small businesses, said the central bank in a report published in December 2023.

“The problem is that there are so many small regional banks that the banking regulator obviously does not have the capacity to control them all,” said Christopher Beddor, deputy director of research on China at Gavekal Dragonomics.

“These consolidations will create less numerous and larger institutions than regulators will be able to supervise more effectively,” he adds, but the strategy will not solve problems such as questionable claims.

The banking index of continental China is up approximately 10% this year, after having won almost 40% last year, carried by the hopes of recapitalization of large banks.

(Written by Ziyi Tang and Ryan Woo in Beijing; Bertrand de Meyer, edited by Blandine Hénault)

Copyright © 2025 Thomson Reuters