China Closes 670 Banks in Financial Consolidation Process

China is closing a record number of banks – 670 in the latest annual count, according to Fitch Ratings. Most have been absorbed by larger creditors. The country now has 3,139 banks – a reduction of 23% over four years.

Most of the closed banks are small rural institutions, which Fitch calls the weakest part of China's financial system. Their bad loan ratio reached 2.8% in the first half of the year compared to an average of 1.5% across banks. Funds were flowing to developers and off-budget companies, through which cities borrow for roads and housing. Economic growth slowed to 4.3% in the second quarter – the lowest since 2022. "We have never seen consolidations of this scale," said Jason Bedford from the National University of Singapore in an interview with the Financial Times. Fitch considers the spread of the crisis unlikely: banks lend locally. However, in July, authorities in Wuhan took control of Z-Bank, which has assets of about 124 billion yuan – the first time since 2019 when Baoshang Bank was nationalized. "We need to avoid any shocks to the financial market and depositor confidence," said Karen Wu from CreditSights.

Previous shocks affected different segments: the nationalization of Baoshang raised funding costs for regional banks, while the freezing of rural banks in Henan sparked protests in 2022. Bitcoin rose in the week following three out of four such shocks. When Silicon Valley Bank collapsed in 2023, First Republic's shares lost over 60% in a day, while BTC gained up to 10%. Currently, BTC is trading around $85,340. There is little direct impact on the crypto market: mainland China banned cryptocurrency trading in 2021, and banks have been prohibited from servicing such operations prior to that. Moody's expects new mergers – regulators are "seeking to address risks in smaller and weaker regional institutions."