China's rural banking sector has experienced a significant decline, with 670 fewer rural small and midsize banks at the end of 2025, representing an 18.6% decrease from the previous year. This decline is attributed to high levels of bad loans and government efforts to restructure smaller lenders.
What happened
Many of the rural banks that disappeared were merged into larger lenders or converted into branches, with their deposits and loans transferred to the surviving institutions. The decline has continued in 2026, with 191 village banks ceasing to operate independently in the first nine months of the year, leaving 973 village banks nationwide as of September 30.
The Chinese government has stepped up efforts to reduce the number of smaller financial institutions, with the 2026 government work report calling for further reduction and restructuring of local small and midsize financial institutions. Rural banks have been particularly affected, with 2.79% of loans classified as nonperforming at the end of the first quarter, more than twice the rate of large commercial banks.
The property slump and local debt have added pressure to the banking sector, with property investment falling 19.9% in the first eight months of 2026 and bank lending to property developers decreasing by 33.3% from the previous year. The International Monetary Fund has warned that the property downturn and debt tied to local governments are adding to banking risks, particularly for smaller banks with less capital available to absorb losses.
