China closes 670 banks in sweeping sector consolidation

China has undergone a massive consolidation of its banking sector, closing a record 670 institutions in 2025. This movement represents approximately one-quarter of the country's total banks. The initiative, led by authorities, aims to strengthen supervision and mitigate risks by merging or dissolving smaller, more vulnerable lenders.

Rural and city commercial banks are identified as the weakest links in the system. These institutions face challenges including weak asset quality, low capitalization, and governance issues. Data indicates that rural banks saw their annualized return on assets drop to 0.45% in the first half of 2026, while their nonperforming loan (NPL) ratio stood at 2.8% as of June, significantly higher than the industry average of 1.52%.

While the broader commercial banking industry remains well-capitalized with a capital adequacy ratio of 15.26%, the total volume of nonperforming loans rose to 3.7 trillion yuan by the end of June. Unlike European banking consolidation, which is largely market-driven to increase competitiveness and efficiency, China's restructuring is state-led and focused on reducing systemic fragility.