“Efforts should be made to effectively prevent and defuse risks in key areas to ensure that no systemic risks occur.” This is a major task for China’s economic work in 2025, according to the Central Economic Work Conference. The conference, aka the annual meeting outlining the country’s economic priorities for the 12 months ahead, was held in Beijing on December 11-12, 2024.
Small and medium-sized financial institutions, generally banks, are primary targets, as the meeting called for more and new efforts to address risks in local small and medium-sized financial institutions in a prudent manner, and joint and coordinated efforts by central and local governments to crack down on illegal financial activities.
In recent years, the Chinese Government has emphasized risk management in said institutions across different documents and meetings.
Small but wide
Although small and medium-sized financial institutions are not as large in scale as their major counterparts, they are often rooted in specific regions and connected to the local economy. They play a big role in serving private enterprises, micro and small businesses, agriculture and rural development.
As of late June 2024, China had 3,830 small and medium-sized banks, primarily consisting of city commercial banks, rural credit cooperatives and village banks, with total assets of 115 trillion yuan ($15.76 trillion), accounting for 28 percent of the banking industry’s total assets. Xiao Yuanqi, Vice Minister of the National Financial Regulatory Administration, told a press conference last August that nearly 80 percent of the 62 trillion yuan ($8.5 trillion) in outstanding loans from small and medium-sized banks were lent to agricultural areas and to micro and small enterprises.
Their specific role allows them to have a more in-depth understanding of the local economic conditions and can better meet local needs. For example, to better serve agriculture, rural areas and rural population, Yongkang Rural Commercial Bank in Jinhua, Zhejiang Province, issues loans for economically underdeveloped villages and villages undergoing rural housing renovations and supports new agricultural business entities, such as agricultural entrepreneurs.
Usually, small and medium-sized banks rely on traditional lending activities to increase their revenues from interest rate spreads and by expanding their size. However, their weak management has generated substantial risks in recent years.
Since 2019, some regional urban commercial banks and village banks have faced major crises.
For example, in 2022, a rural banking scandal broke out in Henan Province, when depositors found they couldn’t withdraw their money from local village banks. Investigations revealed that a criminal group led by main suspect Lu Yi, manager of Henan New Wealth Group, illegally controlled four rural banks and was involved in a series of serious crimes.
Such risks have reduced social capital’s willingness to invest in these banks, made it more difficult for these banks to replenish their capital and, to some extent, affected their ability to sustain long-term development, according to Shang Fulin, former Chairman of the China Banking Regulatory Commission. In addition, the traditional customer acquisition advantages of small and medium-sized banks have been challenged by digital transformation and the entry of large banks into lower-tier markets.
Against this backdrop, China has been comprehensively strengthening financial regulation and effectively preventing and mitigating financial risks. “Financial regulation should be more effective and cover all financial activities in accordance with the law… Risks in small and medium-sized financial institutions should be addressed promptly,” according to the Central Financial Work Conference held in Beijing on October 30-31, 2024.
Ongoing reform
The merger and reorganization of small and medium-sized banks have become an inevitable move to address the increasing emergence of risks. This trend has begun to accelerate in recent years.
Data from the National Financial Regulatory Administration show that the number of small and medium-sized banks had decreased from 4,034 at the end of 2018 to 3,912 as of late 2023.
An industry development report released by the China Banking Association in November 2024 showed that in terms of institutional reform, village banks are accelerating consolidation, with nearly 30 county-level banking institutions exiting the market or being absorbed, merged or dissolved in 2023.
In the first half of 2024, the pace of mergers and reorganization of small and medium-sized banks further accelerated, and this trend continued through the second half of the year. According to a November report in newspaper Securities Times, for example, financial regulatory authorities announced the dissolution of 10 village banks in the month alone.
The reduction is part of China’s reform and risk mitigation measures, Ye Yindan, a researcher with Bank of China, one of the country’s four largest banks, told newspaper Economic Daily, adding that the mergers and restructuring of rural credit cooperatives and village banks has accelerated since early 2024.
Ye said this phenomenon is mainly driven by regulatory policy guidance and intensified market competition. On the one hand, regulators encourage mergers and acquisitions to optimize resource allocation, improve service efficiency, prevent financial risks and maintain financial stability; on the other hand, with the opening up of financial markets and intensification of competition, small banks face challenges. Mergers and restructuring to integrate resources can enhance their competitiveness.
Risk prevention and strengthened regulation are key tasks in promoting the financial sector’s high-quality development. “In terms of reform, we must adopt a pragmatic approach, avoiding a ‘one-size-fits-all’ strategy,” Xiao said at the press conference last August.
China is a vast country with small and medium-sized financial institutions everywhere, from mega cities to small and medium-sized cities, and even to counties and rural areas. The regional conditions each institution serves vary, and each institution’s circumstances also differ, he explained.
“Therefore, it is essential to adhere to the principle of tailoring strategies for each region and each bank,” Xiao added.
It is worth noting that while rural small and medium-sized banks are undergoing “downsizing,” they are also achieving “quality improvement.” The China Banking Association’s report clearly shows that in 2023, rural small and medium-sized banks nationwide achieved steady growth in terms of both assets and liabilities.
Their market shares in deposits and loans, as well as their regional rankings, remained at the top, and their overall operating performance showed a stable trend.
According to the report, by the end of 2023, the assets and liabilities of rural small and medium-sized banks nationwide had both increased by 9.2 percent year on year to reach 54.61 trillion yuan ($7.48 trillion) and 50.66 trillion yuan ($6.93 trillion), accounting for 13.1 percent and 13.2 percent of the banking sector’s total, respectively.
Rural cooperative financial institutions achieved a net operating income of about 1.03 trillion yuan ($141.1 billion) in 2023. Among them, interest income reached 916.25 billion yuan ($125.53 billion), a year-on-year growth of 3.92 percent, demonstrating strong profitability. Their net profit was 259.87 billion yuan ($35.58 billion). Village and township banks recorded a net profit of 7.1 billion yuan ($1 billion). –The Daily Mail-Beijing Review news exchange item
