Amid ongoing concerns about the slowdown of China's economy, China is accelerating the integration of small banks, mainly rural and small-to-medium-sized banks, in order to support its financial system.

According to Fitch Ratings' analysis, driven by policy, a record number of 670 banks in China will be closed by 2025, accounting for about one-quarter of the total number of banks in the country. As regulatory authorities intensify their efforts at mergers and dissolutions, Beijing is attempting to create a smaller number of financial institutions that are larger in scale and more capitalized.

Fitch stated in a report that small banks and rural commercial banks "are still the weakest part of China's financial system," pointing out issues such as "poor asset quality, low capital levels, and inadequate governance," especially in less developed regions of China.

This rating agency stated that the return on assets of rural banks dropped to 0.45% in the first half of this year, lower than 0.56% in 2021. At the same time, the non-performing loan ratio of these banks increased to 2.8% during the same period, which is higher than the industry average of 1.5%; their exposure to small and medium-sized enterprises, real estate developers, and local government financing platforms is also greater.

Fitch stated that this round of integration is aimed at strengthening regulation, curbing regulatory arbitrage, and improving transparency. The agency also pointed out that the pressures on small banks are unlikely to trigger a systemic spread, as these banks' operations are mostly limited to local areas, and their interbank risk exposures are limited.

The rating agency added that these measures "may ultimately reshape the competitive landscape among small banks, although their structural weaknesses may continue to exist in the short term."

At the time this measure was introduced, the world's second-largest economy continued to show signs of being under pressure.

China's gross domestic product ( GDP ) grew by 4.3% in the second quarter, the slowest growth rate since 2022; industrial enterprise profits in August increased by 4.2% year-on-year, the weakest increase this year.