At least 40 high-risk Chinese banks have been lost to mergers in the first six months of this year alone as local lenders buckle under exposure to debts, according to reports.
Small and medium-sized banks, long an integral part of poor towns and villages, numbered 1,636 at the end of last year, according to government statistics, comprising about 40 percent of China's total number of banking institutions.
Many of these local lenders have been hit hard by China's economic slowdown, in particular exposure to the debt crisis roiling the country's real estate market, which earlier this year saw a Hong Kong court order property developer Evergrande to liquidate.
The number of smaller banks that had buckled as of June 24 is four times the number that shuttered in the whole of 2023. The trend is only expected to accelerate as restructuring picks up pace, financial news agency Yicai Global cited industry insiders as saying.
The challenges facing businesses in troubled sectors and other market entities have been weighing on the asset quality of these lenders, reducing chances of loans being repaid, according to these sources.
Rural banks usually have less starting money and fewer large shareholders than the regulatory norm, a bank contact in eastern China told the outlet. This has made it more difficult to manage risks and expenses.
Adding to these banks woes are poor management practices, with fewer hurdles for hiring directors and executives, increasing the risk of misconduct, the sources said.
It is hoped that absorption by urban and rural commercial banks, along with joint-stock lenders will better mitigate risks. Additionally, re-purposing these banks as local branches can aid the larger institution in expanding its reach, financial analyst Zhou Yiqin told the outlet.
Among the 40 insolvent microlenders, 36 have been in Liaoning. The Liaoning Rural Commercial Bank was established in September and tasked with handling the acquisitions of the northeastern province's failed banks.
These three dozen lenders have until December to "complete the termination of legal entities" the Liaoning Supervision Bureau of China's financial regulator said in a June 19 press release.
China's Foreign Ministry did not immediately respond to a written request for comment.
A major factor behind this reliance on consolidation is lack of other options.
Unlike the Financial Institutions Reform, Recovery, and Enforcement Act passed in the U.S. following the Savings and Loan crisis of the late 1980s and early 90s, China does not currently have a framework for resolving the issue by liquidating assets of local banks.
Bank mismanagement has been a source of unrest in China in recent memory. In 2022, fraudulent activities, risky investments, and misappropriation of deposits by several regional banks in Henan depleted their funds.
The banks stopped allowing bank customers to withdraw money, citing system upgrades, leading to a bank run and protests.
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