Mergers of Rural Credit Institutions Continue (AI Translation)

【周刊提前读】农信机构合并继续推进 风险化解成效几何？

[para. 1] In May 2025, Inner Mongolia Rural Commercial Bank (Inner Mongolia RC Bank) officially opened, marking the continuation of county-level rural credit institution mergers driven by rural credit cooperatives' (RCCs) reform in China. The new bank was formed by merging the Inner Mongolia RCC Union with 93 county-level rural credit legal entities and 26 village banks within the region. This bank is the fourth province-level unified legal rural commercial bank (RCB) established since the 2020 provincial RCC union reform. Initially, the reform considered four models for restructuring provincial unions, which have now boiled down to two main types: province-level unified legal person banks and joint banks[para. 1].

[para. 2][para. 3] Ten provinces have completed reforms; Zhejiang and Jiangsu opted for minimal change, maintaining a two-tier legal structure and creating joint banks, while Shanxi, Sichuan, Guangxi, and Jiangxi chose a three-tier joint bank model. Higher-risk, smaller-scale provinces like Liaoning, Hainan, and Inner Mongolia adopted the province-level unified legal person model. In higher-risk provinces such as Henan, after an eight-month trial of a three-tier system, Henan switched to a unified province-level legal person model in February 2025. Accompanying city-level RCBs are being formed across several provinces, often absorbing county-level RCBs (e.g., in Sichuan and Yunnan). By the end of 2024, the total number of rural credit institutions had dropped to 2,044—a decrease of about 270 institutions (over 10%) since late 2021[para. 3].

[para. 4][para. 5][para. 6][para. 7] The main policy aim driving these mergers is to reduce the number of high-risk rural financial institutions. However, industry veterans warn that simply merging does not inherently mitigate risk and may even introduce new management problems if suitable governance mechanisms are not established. Short-term objectives (risk reduction) must be aligned with long-term growth and sustainability goals for effectiveness. Furthermore, there are concerns that a unified province-level structure could siphon funds away from rural areas and diminish local support for county-level agricultural development[para. 4][para. 5][para. 6][para. 7].

[para. 8][para. 9][para. 10][para. 11] In 2025, the merger trend continues, with Henan's new RCB absorbing 25 local institutions and city-level consolidations ongoing, notably in Sichuan. In 2023, out of 3,936 banks rated by the People’s Bank of China (PBOC), 357 were categorized as "high-risk," with all high-risk entities being city commercial banks or various forms of rural financial institutions. Regulatory policy emphasizes rapid mergers and restructuring to reduce the number of such high-risk entities and streamline management, especially considering increased competition from national banks and the digitalization of financial services, which erode the traditional advantages of small rural banks[para. 8][para. 9][para. 10][para. 11].

[para. 12][para. 13][para. 14][para. 15] Industry insiders worry that reducing the number of independent county-level RCBs may weaken rural financing’s responsiveness and degrade their traditional local government ties—an original advantage over large, national banks. Some observe that after such mergers, approval processes become more complex and local resource allocation can worsen, potentially hurting economic support for less-developed counties[para. 12][para. 13][para. 14][para. 15].

[para. 16][para. 17][para. 18] Capitalization is a central challenge for unified province-level RCBs. For example, Inner Mongolia RCB has a registered capital of 58.02 billion RMB, the highest among recent unified banks, funded in part by special bonds for small- and medium-sized bank recapitalization. Between 2020-2022, 550 billion RMB of such bonds have been issued nationally, but provinces face significant strain in balancing bond obligations with local fiscal limitations, especially as interest rates fluctuate[para. 16][para. 17][para. 18].

[para. 19][para. 20][para. 21][para. 22] Guangdong's reform model stands out for its early, distinctive approach. Seven large RCBs were spun off under local government control, holding stakes in and helping manage weaker RCBs. However, declining profits and challenging macroeconomic conditions have prompted a pivot: Guangdong's system is now moving towards a joint bank model similar to other provinces. Despite initial efforts, the sector's profitability fell nearly 11% from 2018 to 2024, mainly under pressure from economic slowdowns and weakened demand[para. 19][para. 20][para. 21][para. 22].

[para. 23][para. 24][para. 25][para. 26][para. 27] With over 3,600 small rural banks still operating, many experts stress that successful reform hinges not just on centralizing control and recapitalizing but also on management improvements, leveraging local knowledge, maintaining differentiated services for rural demands, and supporting risk diversification. Shandong's RCBs demonstrated that a focus on core rural financing missions can gradually resolve non-performing loan problems. For provinces with sound financial health, such as Fujian, analysts suggest that forced reforms may not be necessary[para. 23][para. 24][para. 25][para. 26][para. 27].