Village Banks “Fall Off a Cliff” — A Dangerous Signal for the Situation

On June 25, 2022, depositors who were unable to withdraw money from rural banks in Henan went to the Henan Banking and Insurance Regulatory Bureau to report officials for dereliction of duty. (Photo provided by interviewee)

[People News] It is a well-known fact that China’s economy has remained sluggish in recent years, and the term “cliff-like” has frequently appeared in media and online discussions. When the word “cliff-like” becomes associated with the number of financial institutions being deregistered, the psychological shock it brings to the Chinese public is difficult to describe.

Since last year, the Chinese authorities have launched a wave of so-called “structural” reforms targeting small and medium-sized financial institutions, advancing them at an unprecedented pace. Many banks have rapidly merged their affiliated rural banks, with some already achieving the goal of reducing their numbers to zero.

In 2025, authorities announced that 377 banks disappeared over the year, and more than 9,000 branches were closed. These figures alone were already shocking, yet entering 2026, the situation has become even more severe.

According to a January 19, 2026, report by the Beijing News, “Statistics from the National Financial Regulatory Administration and Enterprise Early Warning data show that in just half a month this year, more than 70 banks are set to be consolidated. In the same period last year, the number was only eight.”

In addition, on April 22, a report by Cailian Press cited Enterprise Early Warning data showing that 220 small and medium-sized financial institutions (including rural commercial banks, credit cooperatives, and village banks) have already been approved for merger or dissolution this year. Among them, the wave of deregistration of village banks has been particularly rapid, aptly described as “cliff-like”: “In just four months this year, more than 120 village banks have been approved for merger or dissolution, a fourfold increase year-on-year.”

According to state media reports, industry insiders noted that the “village-to-village merger” model allows new institutions to maintain independent legal status as village banks and serve local agriculture and small businesses more flexibly. However, such cases are relatively rare; instead, “village-to-branch” and “village-to-subsidiary” transformations have become the mainstream. For example, at the end of January this year, Bank of Communications was approved to acquire Shihezi Bank of Communications Village Bank in Xinjiang, meaning that all four village banks under its umbrella have been eliminated and converted into branches. China Minsheng Bank also received approval in April to acquire its third village bank, accelerating the reduction of small banks at a “cliff-like” pace.

Why are authorities so eager to cut down small rural banks? The answer is quite clear: the economic and employment environment continues to deteriorate, ordinary people have less money, the real estate sector remains depressed, corporate cash flows are tight, and local fiscal revenues are drying up. These pressures ultimately concentrate on the weakest institutions—small and medium-sized banks. Once these banks collapse, the biggest victims are the millions of depositors.

Many commentators believe that the large-scale depositor protests in Henan in 2022 were one of the main triggers for this wave of reforms targeting small financial institutions.

Starting on April 18, 2022, four village banks in Henan Province—Yuzhou Xinminsheng Village Bank, Shangcai Huimin Village Bank, Zhecheng Huanghuai Village Bank, and Kaifeng New Oriental Village Bank—simultaneously and without warning shut down their online withdrawal and transfer services, leaving depositors unable to access their funds. This triggered widespread panic, leading depositors to launch collective rights-defence actions and protests.

According to the China Banking and Insurance Regulatory Commission, the case was caused by collusion between internal and external shareholders. Reports indicate that it involved at least tens of billions of yuan and affected around 400,000 depositors.

Observers note that in the years since the incident, authorities have not extended meaningful assistance to the affected depositors. Throughout their prolonged struggle, stories of debt collection efforts, petitions, and suppression have continued to emerge. In some cases, local depositors were repaid, while non-local depositors remained frozen out for long periods, left without recourse.

This incident also exposed deep-rooted problems in village banks, including chaotic governance, misappropriation of loan funds, failure of risk controls, opaque related-party transactions, and long-standing deficiencies in the “three checks” of lending (pre-loan investigation, mid-loan review, and post-loan inspection). It fundamentally shattered public trust in financial institutions under the control of the Chinese Communist Party.

Professional analysts point out that although banks acquiring village banks can optimise regional layouts and improve risk control efficiency, they still face short-term challenges such as absorbing non-performing assets, integrating systems, and adjusting personnel.

When administrative orders force large banks to absorb small ones, they are essentially taking on piles of worthless “toxic assets.” If new bad debt black holes emerge during the merger process, or if depositors protest, local authorities may shift responsibility to the central government, while large banks may blame policy mandates. This blame-shifting dynamic ultimately risks reducing reforms to superficial changes—“new signs, same problems”—with underlying risks unresolved.

The disappearance of 70 banks in just half a month this year sends a dangerous signal to the public: when large banks themselves begin to be dragged down by these bad assets and see their profits eroded, reforms may stall due to being “too difficult to push forward” or “too costly.” The final outcome could be that small banks are gone, large banks become weakened, and overall risks become more concentrated and hidden. When the credibility of the entire financial system under CCP control collapses, it may also signal the regime’s own downfall.

(First published by People News) △