China closed a record 670 banks in 2025 as Beijing accelerated a sweeping consolidation of the country's financial sector amid growing problems among smaller lenders and a slowing economy.

The closures, which overwhelmingly involved rural banks, are part of a government effort to merge weaker institutions into fewer, larger banks with stronger capital positions. Fitch Ratings found that the number of Chinese banking entities fell to 3,139 by the end of 2025, a 23% decline over four years. China's banking system holds roughly $64 trillion in assets.

Fitch has identified small rural and city-level banks as the weakest part of China's financial system, pointing to poor asset quality, limited capitalization and governance problems, particularly in less-developed regions.

The pressure on those lenders has increased as China's economy struggles with a prolonged property downturn, weak demand for credit, deflationary pressures and low interest rates that have reduced banks' profitability.

Rural banks' return on assets fell to 0.45% during the first half of 2026, down from 0.56% in 2021. Their nonperforming loan ratio reached 2.8%, compared with 1.5% across China's banking sector.

Those smaller institutions are particularly exposed to struggling small businesses, troubled property developers and local government financing vehicles, leaving them vulnerable to further deterioration in China's economy.

Jason Bedford, a senior visiting research fellow at the National University of Singapore's East Asian Institute, described the consolidation as unprecedented in scale and said the restructuring is partly intended to prevent liquidity problems at smaller banks from developing into broader crises.

Rather than allowing many troubled lenders to collapse outright, Chinese regulators have generally favored mergers in which larger institutions absorb their assets and liabilities. Fitch said the approach could improve oversight and transparency while limiting opportunities for regulatory arbitrage.

The restructuring has also extended to larger city-level institutions. In July, Chinese authorities took control of Wuhan-based Z-Bank and transferred it into Hankou Bank, marking the first takeover of its kind since regulators seized Baoshang Bank in 2019.

Beijing has simultaneously been strengthening the capital positions of its largest state-controlled financial institutions. Authorities announced a $54 billion capital increase involving insurers and banking giants Industrial and Commercial Bank of China and Agricultural Bank of China after injecting nearly $70 billion into four major state-owned banks the previous year.

Despite the scale of the cleanup, Fitch said problems among smaller lenders are unlikely to trigger a systemwide financial crisis because their operations tend to be geographically concentrated and their exposure to other banks is relatively limited.

The banking consolidation comes as China's broader economy shows signs of losing momentum. Gross domestic product grew 4.3% in the second quarter, the country's slowest quarterly growth rate since 2022, while industrial-profit growth slowed to 4.2% in August.

The government-led restructuring therefore represents both an effort to strengthen China's banking system and a response to mounting financial pressure from years of economic weakness.