China is embarking on its biggest consolidation in the banking industry by merging hundreds of rural lenders into regional behemoths amid growing signs of financial stress.

After engineering mergers of rural cooperatives and rural commercial banks in at least seven provinces since 2022, policymakers pinpointed tackling risks at the US$6.7 trillion (HK$52.2 trillion) sector as one of its top priorities for this year. That means another wave of consolidation is on the way across the nation.

China's banking industry has been weighed down by a litany of troubles over the past years, including a deepening slump in the real estate market and an overall fragile economy. The 2,100 banks in the rural cooperative system saw their bad-loan ratio stand at 3.48 percent at the end of 2022, more than twice as high as that for the whole sector.

"It's where risks are the most concentrated among smaller financial institutions, so China is pushing the reform at a faster pace," said Liu Xiaochun, deputy director of think-tank Shanghai Finance Institute. "And one key solution to resolving the risks is through mergers and reorganizations."

The stakes are high politically as well. Hundreds of people protested in central Henan province in 2022 after a multi-billion-dollar scam at several local lenders left them clamoring for their savings.

Analyst Jason Bedford said rural cooperatives are "probably the least transparent part of the banking system." China has disposed of bad debt equivalent to about 13 percent of its gross domestic product in its last big cleanup of the banking system during 2016 and 2022, he said.

Rural lenders are under pressure. Xinhua

Beijing merging hundreds of banks