Hundreds of Chinese Banks Are Closing. Should Bitcoin Investors Worry?

China's weakest lenders are being wiped out quietly. In the most recent annual tally, a record 670 shut down — mostly absorbed by larger institutions — and Fitch Ratings puts the remaining count at 3,139, a 23% decline over four years.

Banking stress seldom remains contained. After Silicon Valley Bank collapsed in 2023, First Republic lost over 60% of its share value in a single session. Bitcoin, meanwhile, climbed by up to 10%.

What Is Driving China's Small-Bank Shakeout?

Rural institutions made up the bulk of the closures. In Fitch's assessment, they represent the most fragile segment of China's financial system.

Fitch reported that non-performing loans — debt that borrowers have failed to repay — reached 2.8% at these lenders in the first half. For the banking sector as a whole, the comparable ratio stood at 1.5%.

A large share of that lending flowed to real-estate developers. It also went to off-budget entities that municipal governments use to borrow for roads and housing.

The broader economy has also lost momentum. Second-quarter growth decelerated to 4.3%, the softest pace since 2022. Fresh yuan lending even posted outright declines in both April and July.

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

Fitch Sees Little Contagion Risk, but a Chinese City Bank Was Taken Over in July

Fitch considers a wider spillover unlikely, noting that these banks lend locally and take limited funding from peers.

Still, the stress is no longer confined to rural areas. Authorities in Wuhan assumed control of Z-Bank in July, a lender holding around 124 billion yuan in assets. No Chinese bank had been taken over that way since Baoshang Bank in 2019.

“You have to avoid any type of disturbance to the financial market and depositors’ confidence,” said Karen Wu. Wu is an analyst at the credit consultancy CreditSights.

Wu stressed that Beijing has to proceed with caution.

How Earlier Bank Crises Rippled Through Markets

In previous episodes, different parts of the market felt the pain. After Baoshang was seized, regional lenders saw their funding costs rise. Frozen village banks in Henan sparked street demonstrations in 2022.

Bitcoin (BTC) moved higher in the seven days following three of those four episodes. BeInCrypto data puts the cryptocurrency's price near $85,340 at the time of writing.

This time around, crypto has limited direct vulnerability. Crypto trading has been prohibited in mainland China since 2021, and Chinese banks were already forbidden from processing crypto-related transactions.

The cleanup, however, is far from finished. Moody's anticipates further consolidation as authorities “seek to address risks at smaller and weaker regional institutions.”