China's record mergers in 57 trillion yuan small banking sector raise future risks

China oversaw its largest-ever wave of rural bank mergers last year, a Reuters review of official data showed, but analysts say Beijing's efforts to tackle risks in the small banking sector could end up creating more problems down the road.

Many of the roughly 4,000 small Chinese banks are backed by indebted provincial governments and largely funded via short-term money market and interbank borrowings, potentially jeopardising financial stability in the event a few of them fail.

The move comes at a time when many of these smaller banks have been hit hard by slowing loan growth and a spike in bad loans amid a property sector crisis and a prolonged downturn in the world's no 2 economy.

At least 290 rural Chinese banks and rural cooperatives were merged into larger regional lenders in 2024, according to Reuters calculation of regulatory and company filings over the past 12 months.