China accelerates financial sector restructuring as hundreds of banks close

Throughout 2025, China closed or merged more than 670 banking entities, marking a significant acceleration in the government's efforts to restructure its financial system. Within a four-year period, the total number of banking institutions in the country has decreased by 23%, dropping to 3,139. According to the National Financial Regulatory Administration and Fitch Ratings, the closures primarily targeted rural and small commercial banks that faced persistent issues with asset quality, low capital adequacy, and poor management.

The initiative aims to consolidate the fragmented banking sector, creating larger, more stable entities to mitigate systemic risks. Small rural banks have been identified as the most vulnerable segment, reporting a non-performing loan ratio of 2.8%, compared to 1.5% for the broader industry. Their return on assets also declined to 0.45% in the first half of the reporting period, down from 0.56% in 2021. This fragility is largely attributed to excessive exposure to the struggling real estate market, small businesses, and local government financing vehicles, exacerbated by deflationary pressures and low interest rates.

Beijing’s strategy focuses on preemptive mergers and capital injections rather than allowing uncontrolled failures. These measures are designed to strengthen the overall financial landscape amid a broader economic slowdown and reduced credit demand.