670 Banks Disappear in China Amid Financial Instability and Bitcoin Watchfulness

[Block Media Reporter Lee Jeong-hwa]
A large-scale restructuring is underway among small and medium-sized banks in China. Recently, it was reported that 670 banks have closed or been absorbed by larger financial institutions on an annual basis. The real estate slump and local government debt issues are putting pressure on the soundness of local banks, prompting Chinese financial authorities to accelerate the cleanup of weak financial institutions.

The market is paying attention to whether the restructuring of banks in China will spread to overall financial market instability. This is because there have been instances where Bitcoin surged during past banking crises, such as the collapse of Silicon Valley Bank (SVB) in the United States. However, it is assessed that the direct connection between Chinese banks and the Bitcoin market is limited, as trading of digital assets is prohibited in mainland China.

23% Decrease in Chinese Banks Over Four Years... Concentrated Restructuring of Local Banks

On the 6th, BeInCrypto reported, citing data from international credit rating agency Fitch, that 670 banks have disappeared in China recently on an annual basis. A significant number of these have been absorbed or merged with larger financial companies rather than closing down.

The number of banks in China has decreased by about 23% over the past four years, totaling 3,139 banks.

The restructuring targets are primarily small banks operating in rural areas. Fitch assessed these financial institutions as relatively weak parts of the Chinese financial system.

In fact, the asset soundness of small and medium-sized banks is worse than that of the overall banking sector.

According to Fitch, the non-performing loan ratio of these banks was recorded at 2.8% in the first half of this year, significantly higher than the overall non-performing loan ratio of 1.5% for all banks in China.

The problem is that a significant portion of loans is concentrated on real estate developers and local government-related projects that have been experiencing prolonged stagnation.

Chinese local governments have been utilizing local government financing vehicles to raise funds for infrastructure projects such as roads and housing. As the real estate market slows down and local governments' financial conditions worsen, the burden on local banks that supplied funds to them is also increasing, according to analysis.

China's economic slowdown is also putting pressure on the banking sector. The economic growth rate for China in the second quarter was 4.3%, the lowest level since 2022. In April and July, new yuan loans also decreased.

Jason Bedford, a senior visiting researcher at the National University of Singapore, told the Financial Times (FT), "We have never seen a bank consolidation of this scale before."

From Rural to Urban Banks... Wuhan Bank Also Under Government Management

So far, the prevailing assessment is that the problems of local banks in China are unlikely to spread to the entire financial system.

Fitch analyzed that small and medium-sized banks primarily handle loans within their regions and that the scale of funds raised from other financial companies is relatively small, limiting the possibility of contagion among financial institutions.

However, recently, there have been movements indicating that the burden in the financial sector is spreading from rural areas to urban banks.

In July, the Wuhan city authorities took over Z Bank, which has assets of approximately 124 billion yuan, and began management. This is the first time since Baoshang Bank in 2019 that Chinese authorities have managed a bank in this manner.

This is why Chinese financial authorities are cautious about damaging depositors' trust while restructuring local banks.

Karen Wu, an analyst at Credit Suisse, stated, "We must avoid situations where confusion arises in the financial market and among depositors," analyzing that Chinese authorities need to proceed with the restructuring carefully.

In the past, there have been instances where issues with local banks led to instability in the financial market.

When Baoshang Bank came under government management in 2019, the funding costs for local financial institutions rose. In 2022, in Henan province, some rural banks suspended deposit withdrawals, leading to protests from depositors.

Limited Impact on Bitcoin... Whether Financial Market Instability Spreads is a Variable

In the digital asset market, there is interest in the impact of the restructuring of Chinese banks on Bitcoin prices.

A representative case highlighting the relationship between banking instability and Bitcoin is the banking crisis in the United States in 2023.

After the collapse of Silicon Valley Bank, the stock price of First Republic Bank plummeted by more than 60% in a single day, spreading instability primarily among regional banks in the U.S. In contrast, Bitcoin surged by as much as 10% in a single day.

As trust in traditional financial institutions wavered, Bitcoin, which can be traded independently of the banking system, was highlighted as an alternative asset, according to analyses made at that time.

It is uncertain whether the current restructuring of Chinese banks will lead to a similar trend.

Mainland China has prohibited trading of digital assets since 2021. Banks have also been unable to handle transactions related to digital assets for some time. This is why the restructuring of Chinese banks is unlikely to directly cause capital inflows or outflows in the Bitcoin market.

Bitcoin is currently trading around $85,940.

The key question going forward is whether the issues with local banks in China will spread to overall credit instability in the financial system. If concerns about financial institutions grow and risk asset investment sentiment diminishes, Bitcoin could also be affected by changes in global liquidity and risk appetite.

Conversely, if the erosion of trust in the banking sector becomes prominent, the decentralized characteristics of Bitcoin may again come into focus. While there have been instances in the past where Bitcoin surged during banking crises, it is difficult to conclude that the same price movements will occur this time.

The restructuring of small and medium-sized banks in China is expected to continue for the time being. Moody's predicts that Chinese financial authorities will pursue additional mergers and restructuring to reduce the risks of weak local financial institutions.

This content is provided for general informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online promotions, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets. Crypto assets are highly volatile and may result in loss. The availability of WEEX services, products, and related events may vary by region. You are responsible for ensuring that your participation is in accordance with applicable local laws and regulations.