China has stepped up the consolidation of small and rural banks, with Fitch Ratings reporting a record 670 lender closures in 2025.
The policy-led programme removed about one-quarter of the country’s banks last year through mergers and dissolutions, according to an analysis by Fitch Ratings. Authorities aim to create fewer, larger and better-capitalised institutions amid ongoing concerns over an economic slowdown. Official data for the second quarter of 2026 shows that China’s banking and insurance sectors continued to expand their balance sheets, while non-performing loans (NPLs) rose slightly.
Rural lenders remain the main area of weakness
Fitch Ratings identified small and rural commercial banks as the weakest segment of China’s banking system. It cited poor asset quality, low capitalisation and governance shortcomings, particularly in less developed regions. Return on assets among rural banks fell to 0.45% in the first half of 2026, compared with 0.56% in 2021. Their NPL ratio rose to 2.8% over the same period, above the sector average of 1.5%. This reflects greater exposure to smaller companies, property developers and local government funding vehicles.
According to Fitch, the consolidation is designed to strengthen oversight, curb regulatory arbitrage and improve transparency. The agency considers systemwide contagion from stress at smaller lenders unlikely, given their largely localised operations and limited interbank exposure. It added that the measures could reshape competitive dynamics among smaller lenders over time, although their structural weaknesses may persist in the near term.
Sector-wide indicators for the second quarter of 2026
Total assets of China’s banking institutions reached USD 73.8 trillion at the end of June 2026, up 6.6% year on year. Large commercial banks held USD 32.8 trillion, or 44.5% of the total, following 8.5% growth. Joint-stock commercial banks accounted for 16.1%, with USD 11.9 trillion.
Outstanding NPLs at commercial banks stood at USD 548 billion, an increase of USD 7.7 billion from the end of the first quarter. The NPL ratio rose by 0.01 percentage points to 1.52%. Commercial banks recorded net profit of USD 178 billion in the first half of the year, with an average return on assets of 0.58% and return on equity of 7.72%. Loan loss provisions totalled USD 1.13 trillion, giving a provision coverage ratio of 202.87%. The capital adequacy ratio was 15.26%, and the core tier-1 ratio was 10.72%.
Liquidity indicators were mixed. The liquidity coverage ratio fell by 3.12 percentage points from the previous quarter to 148.53%, and the loan-to-deposit ratio rose to 80.08%. Inclusive loans to micro and small enterprises reached USD 5.76 trillion, up 8% year on year. Inclusive agriculture-related lending grew 7.5% to USD 2.22 trillion.
In insurance, total assets of insurers and insurance asset management companies reached USD 6.5 trillion, up 6.2% since the start of 2026. Primary premium income for the first half of the year rose 3.2% to USD 578 billion. The number of new policies written increased 27.4% to 66.8 billion. The sector’s comprehensive solvency ratio of 180.6% and core solvency ratio of 133.5% were both above the regulatory requirements of 100% and 50%.
Macroeconomic backdrop
The consolidation drive coincides with slower growth. China’s GDP grew 4.3% in the second quarter of 2026, its slowest pace since 2022. Industrial profits rose 4.2% year on year in August 2026, their weakest pace this year.
Rural banks perform worse than the system as a whole. Their return on assets is 0.45%, compared with an average of 0.58% for commercial banks, and their NPL ratio is 2.8%, compared with 1.52%. This gap shows which segment the closures target. The system’s headline capital and provisioning ratios remain above the levels reported for its smaller lenders.
