Chinese Bank Mergers: Another Sign of Economic and Financial Fragility

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Oct 31, 2025 - 11:05 Updated: Oct 31, 2025 - 03:46
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Chinese Bank Mergers: Another Sign of Economic and Financial Fragility

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Commentary

In a clear sign that Chinese officials anticipate trouble, the Henan office of China’s National Financial Regulatory Administration (NFRA) has announced mergers in Henan Province involving as many as 82 small financial institutions.

They will be consolidated into a single financial institution with the larger Henan Rural Commercial Bank. The consolidation will involve tiny village banks and somewhat larger institutions across nine cities. Since none of the banks involved has reported recent trouble, the only reason for such a consolidation is an acknowledgement by the authorities that China’s financial structures are weak and vulnerable to even modest problems.

In announcing the move in late September, NFRA head Li Yunze said resolving financial risk was his agency’s top priority. He then went on to suggest that similar actions will occur in other provinces, saying, “One province, one policy.”

No doubt, behind this broad effort stands the ominous finding in the People’s Bank of China’s 2024 Financial Stability report, which identified excessive risk in some 357 financial institutions across China.

Although the authorities clearly indicate an expansion of the consolidation program, Henan is a likely place to start. In 2022, loan risks among many banks in the province forced the authorities to freeze deposits at four institutions. That action prompted panic, with large crowds rallying outside most banks, demanding access to their deposits. Tensions at the time became especially intense because many of the affected smaller banks had connections to local governments, local politicians, and companies affiliated with these political interests.

Behind the obvious concerns about risk and the weakened state of Chinese finance, Beijing may also aim, with this move, for more centralized control. The drive for control has, after all, been a hallmark of Chinese Communist Party (CCP) leader Xi Jinping’s tenure in office, and it is easier to monitor and direct a few large institutions than a host of smaller, scattered operations.

A desire for greater control might also reflect Beijing’s awareness that local governments have mismanaged their finances and, in the process, created excessive and encumbering debt loads. Relieving local governments of their associations with smaller banks could allow the CCP to get a handle on this problem and impose greater financial discipline on these local authorities.

If this desire for greater control has likely factored into this bank consolidation effort, there is also a clear need for Beijing to manage the financial risk endemic to China today. The property crisis that broke out in 2021 following the failure of the property development giant Evergrande remains a major problem. Despite the CCP’s efforts to mitigate the crisis’s effects, it continues to pose risks to all Chinese financial arrangements and to create a direct drag on the Chinese economy.

The general economic slowdown and the impact of the property crisis on household balance sheets have heightened caution among Chinese consumers, further thwarting the CCP’s efforts to put the economy back on track. Also raising risk levels in China are U.S. President Donald Trump’s tariffs on Chinese goods entering the United States and threats to add to those levies. From all this, it is easy to accept the Chinese central bank’s relatively recent report on risk levels in Chinese finance and act on it.

If this backdrop of the NFRA action and prospective actions highlights weaknesses in Chinese finance, it also carries at least a pinch of encouragement. Despite the economic and financial setbacks China has suffered since 2021, Beijing has consistently failed to get ahead of events. Here, by consolidating before trouble looms, is at least an attempt to get ahead of events.

Beijing’s purely reactive manner to date is well documented. It, for instance, took the authorities two years after Evergrande’s failure to even begin efforts to mitigate the financial and economic fallout of what was almost immediately a national crisis. The same has been the case with the pressures on the Chinese consumer and the need to reorient China’s economy away from its export dependence, a need that was evident long before Trump won his second term.

In contrast to this disappointing history, the consolidation moves seem to have a proactive character. It appears Beijing has moved before the threatened banking troubles have had time to cause problems. To this extent, these admittedly small moves, given China’s larger economic and financial problems, carry an admittedly small measure of optimism about Beijing’s ability to manage a dire situation for all Chinese.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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