China Closes 670 Banks in Massive Financial Cleanup

China is systematically closing down hundreds of its weakest banks, with a record 670 institutions shuttered in the latest yearly count. Most of these were small rural lenders, leaving just 3,139 banks after a 23% drop over four years, according to Fitch Ratings. The closures highlight growing financial instability, as bad loans, money borrowers fail to repay, reached 2.8% for these small lenders, compared to 1.5% across all banks. Much of the troubled debt was extended to property developers and off-budget city projects.

The economic slowdown is contributing to the crisis. Growth in the second quarter dipped to 4.3%, the weakest since 2022, and new yuan loans even declined in April and July. While Fitch Ratings downplays the risk of contagion, noting that these banks operate locally and borrow little from others, concerns persist. In July, Wuhan authorities took over Z-Bank, a lender with 124 billion yuan in assets, marking China’s first such takeover since 2019.

Past bank failures have had varied impacts on markets. The seizure of Baoshang Bank in 2019 increased funding costs for regional banks, while frozen village bank deposits in Henan sparked protests in 2022. Notably, Bitcoin (BTC) prices rose in the week following three of these four shocks, trading near $85,340 as of the latest data. Despite mainland China’s 2021 ban on crypto trading and restrictions on banks handling crypto transactions, the ongoing cleanup of weak financial institutions could still ripple through markets.

Analysts predict more bank mergers as regulators aim to stabilize smaller, weaker regional institutions. Jason Bedford, a senior visiting research fellow at the National University of Singapore, described the current consolidations as unprecedented. Meanwhile, Karen Wu of CreditSights emphasized the need for careful measures to avoid disturbing financial markets and depositor confidence.