China Shuts 670 Banks as Bitcoin Eyes Financial Risks

China is accelerating a sweeping cleanup of its banking sector, closing or absorbing a record 670 lenders in the latest yearly count as regulators target financially weak institutions.

According to Fitch Ratings, China now has 3,139 banks, down 23% over four years. Most institutions disappearing are small rural lenders that have struggled with rising bad loans and exposure to the country's property downturn.

Fitch said non-performing loans at these smaller banks reached 2.8% during the first half, compared with 1.5% across China's banking industry. Many loans were extended to property developers and local government financing vehicles used to fund infrastructure and housing projects.

The consolidation comes as China's economy loses momentum. Economic growth slowed to 4.3% in the second quarter, its weakest pace since 2022, while new yuan lending contracted in April and July.

"We've never seen consolidations on this scale before," Jason Bedford, a senior visiting research fellow at the National University of Singapore, told the Financial Times.

Fitch believes widespread financial contagion remains unlikely because smaller banks primarily operate locally and have limited borrowing relationships with other lenders. However, signs of stress have emerged outside rural banking.

In July, authorities in Wuhan took control of Z-Bank, which had roughly 124 billion yuan in assets. It marked China's first such bank takeover since Baoshang Bank in 2019.

Previous banking crises show why investors are watching developments closely. Baoshang's takeover increased funding costs for regional Chinese banks, while frozen deposits at village banks in Henan triggered protests in 2022.

Banking turmoil has also influenced Bitcoin in the past. During the 2023 U.S. regional banking crisis, First Republic shares plunged more than 60% in a single session while Bitcoin surged as much as 10%.

Bitcoin was trading near $85,340 at the time of writing. Direct exposure to China's banking problems remains limited because mainland China banned cryptocurrency trading in 2021 and previously prohibited banks from processing crypto transactions.

Still, China's banking consolidation is expected to continue. Moody's anticipates further mergers as regulators work to contain risks at smaller and financially weaker regional lenders.