China Eliminates Hundreds of Rural Banks as Bad Loans Weigh on Small Lenders

China had 670 fewer rural small and midsize banks at the end of 2025 than a year earlier, a decline of 18.6 percent, according to regulatory data reported by Chinese financial news outlet Caixin.

Many were merged into larger lenders or converted into branches, with deposits and loans transferred to the surviving institutions.

The count measures the disappearance of independent banking entities rather than hundreds of conventional bank collapses.

The decline has continued in 2026 among village banks, one category of rural lender.

State-run financial newspaper Securities Times reported that 191 village banks ceased operating independently in the first nine months of the year.

That left 973 village banks nationwide as of Sept. 30, down from 1,651 at the end of 2021.

Chinese authorities have also stepped up efforts to reduce the number of smaller financial institutions.

The 2026 government work report in March called for further reducing and restructuring local small and midsize financial institutions and for the orderly handling of high-risk institutions.

In April, China’s banking regulator said rural banks should continue restructuring and allowed banks to reduce existing county and village outlets while maintaining basic financial-service coverage.

Rural Banks Carry Higher Share of Bad Loans

At rural commercial banks, 2.79 percent of loans were classified as nonperforming at the end of the first quarter—meaning borrowers were seriously behind on payments or considered unlikely to repay, according to data released by China’s National Financial Regulatory Administration in July.

That was more than twice the 1.22 percent share at China’s large commercial banks.

Rural commercial banks held 853 billion yuan ($120 billion) in such loans.

The broader commercial banking system also reported more bad loans in the second quarter.

They totaled 3.7 trillion yuan ($520 billion) by the end of June, while their share of lending edged up to 1.52 percent, according to China’s banking regulator.

Property Slump, Local Debt Add Pressure

Property investment fell 19.9 percent in the first eight months of 2026, while bank lending received by property developers fell 33.3 percent from a year earlier, according to China’s National Bureau of Statistics.

The International Monetary Fund (IMF) warned in its 2025 review of China’s financial system that the property downturn and debt tied to local governments were adding to banking risks.

Much of that debt sits in local-government financing vehicles—state-owned companies created by local authorities to borrow for infrastructure and other projects, often outside their formal budgets.

Banks held about three-quarters of that debt, the IMF estimated.

Smaller banks had less capital available to absorb losses, paid more to raise funds, and relied on a narrower range of borrowers, the IMF said.

The IMF also warned that mergers alone “may not address underlying fragilities.”

Delaying recognition of loan losses can obscure the condition of banks’ assets, it said.

China’s local-government debt was the subject of an October 2024 study by economists at the Reserve Bank of Australia, Australia’s central bank.

The study focused on China because its economy and financial system have significant implications for Australia, whose largest trading partner is China.

The economists found that smaller Chinese city and rural commercial banks tend to hold more debt from local-government financing vehicles than major state-owned and joint-stock banks.

They attributed the difference to the smaller lenders’ regional focus and closer ties to local governments.

When heavily indebted local-government financing companies struggle to repay, banks face a trade-off, the economists wrote.

Giving the companies more time to repay or lowering their interest rates reduces bank earnings.

Refusing to renew troubled loans can force banks to recognize losses, potentially leaving smaller lenders without enough capital to absorb them.