China is intensifying efforts to consolidate its financial sector by promoting mergers among banks and securities firms, aiming to create globally competitive financial institutions. This initiative seeks to enhance risk management and stabilize the financial system, particularly in response to a prolonged property crisis.

The Chinese government's strategy involves reducing the number of small, fragmented institutions and fostering the development of robust financial entities. Since late 2023, mergers involving firms managing over 20% of China's securities sector assets have taken place. Top leaders, including President Xi Jinping, have emphasized developing elite investment banks capable of supporting China's long-term economic transition and competing globally. This restructuring is expected to span a decade, focusing on stabilizing and fortifying financial institutions instead of merely reducing their number.

The consolidation efforts are also a response to the ongoing property crisis. China's property sector is expected to remain weak in 2025, with home prices projected to fall by 4.8%, according to a Reuters poll of 12 analysts conducted in May. This marks a downward revision from a previous forecast of a 2.5% decline earlier in the year. Analysts now expect prices to stay flat in 2026, rather than post modest growth. Contributing to the prolonged downturn are factors such as oversupply, low buyer confidence, high developer debt, and weak economic conditions. Adding to the sector's challenges are escalating trade tensions between China and the U.S., which are dampening economic growth and buyer sentiment. The real estate market, once a major driver of China's economy, is no longer viewed as a stabilizing force amid a policy shift toward self-sufficiency in advanced manufacturing. Despite recent government stimulus measures, including mortgage rate cuts and local government purchases of unsold homes, these efforts have had limited impact, particularly in lower-tier cities. Property sales are forecast to decline by 5.0% and investment by 8.4% in 2025, both worse than earlier expectations.

The consolidation of China's financial sector is expected to have several significant implications:

Enhanced Risk Management

By reducing the number of small, vulnerable institutions, the consolidation aims to strengthen risk management capabilities and stabilize the financial system.

Global Competitiveness

The creation of larger, more robust financial institutions is intended to enhance China's competitiveness in the global financial market.

Impact on the Property Market

The consolidation is also seen as a response to the prolonged property crisis, with the aim of mitigating risks associated with the real estate sector.

The consolidation of China's financial sector is likely to have broad social and economic implications:

• Employment: Mergers may lead to job redundancies, affecting employment in the financial sector.
• Access to Financial Services: The reduction in the number of financial institutions could impact access to financial services, particularly in rural areas.
• Economic Stability: While the consolidation aims to stabilize the financial system, the process may also introduce short-term uncertainties and challenges.

In conclusion, China's intensified efforts to consolidate its financial sector through mergers among banks and securities firms represent a significant shift aimed at creating globally competitive institutions and enhancing risk management. While these efforts are designed to stabilize the financial system, particularly in response to the prolonged property crisis, they also carry potential risks and broader social and economic implications that warrant close examination.