China is merging hundreds of small banks to fend off financial stress

• China is merging hundreds of small rural banks to stomp out bad loan conditions, Bloomberg reported.
• In 2022, the bad-loan ratio of small banks was twice that of the whole sector.

Beijing is tackling high-risk financial lenders by enacting a major consolidation wave that will merge hundreds of dealers across the $6.7 trillion sector, Bloomberg reported.

These smaller, rural banks will eventually join together into massive regional institutions. The move aims to squash bad debt conditions that have proliferated among the 2,100 lenders under scrutiny.

It's a concern Beijing desperately needs to tackle, as mounting domestic debt has applied broad downside pressure on China's economy over the last few years.

At the end of 2022, the bad-loan ratio in the rural cooperative bank system stood at 3.48%, more than double that of China's entire financial sector.

That year, Beijing first began orchestrating mergers between risky lenders. Its efforts erased half of all such banks, with rural, village, and county operations making up 96% of the eliminated dealers.

The group's issues stem from a lack of oversight and transparency, analysts told Bloomberg. For instance, these smaller cooperatives have been cited as putting profit ahead of their policy duties, such as by offering loans beyond their rural and agricultural areas.

It also resulted in political turmoil. In 2022, four local banks in the Henan province colluded with a stakeholder to attract billions of yuan through online platforms, freezing hundreds of people out of their savings and triggering protests.

But Beijing will have to be mindful of its approach, as its previous merger enforcement didn't necessarily lead to improved bad-loan ratios, Bloomberg noted. Additionally, internal management issues could crop up, with numerous banks now having to act as one.