(Yicai) Dec. 12 -- China will further reduce the number of small and medium-sized financial institutions and improve their quality next year, as part of broader efforts to prevent financial risks and deepen reforms in the capital market, according to arrangements outlined at the Central Economic Work Conference.

The conference, held in Beijing from Dec. 10 to 11, said policymakers will press ahead with efforts to streamline smaller financial institutions while continuing to advance comprehensive reform of investment and financing in the capital market, signaling a focus on improving the efficiency and stability of the financial system.

“Reducing quantity and improving quality means that small and medium-sized financial institutions are expected to continue cutting their numbers through mergers and reorganizations, while enhancing corporate governance and risk management capabilities to better prevent risks and serve the real economy,” Lin Yingqi, director of the research department at China International Capital Corp. and a banking analyst, told Yicai.

In recent years, as reform and risk resolution among small and medium-sized financial institutions have progressed, “reducing quantity and improving quality” has effectively become a key pathway for reform and risk mitigation, industry insiders said.

The policy direction has been repeatedly emphasized at the central level. In a signed article published in the People’s Daily on Dec. 3, Wang Jiang, deputy director of the Office of the Central Financial Commission, wrote that authorities should “steadily and orderly promote the merger and reorganization of small and medium-sized financial institutions, reduce their quantity and improve their quality, and enable them to take root locally and pursue differentiated operations.”

Excessive competition in the financial market often pushes institutions to adopt short-term strategies to seize market share and customers, leading to disorder and the buildup of long-term risks, Dong Ximiao, chief researcher at Merchants Union Consumer Finance, told Yicai. He said the market should encourage moderate competition and guard against excessive rivalry.

“At the same time, efforts should be accelerated to reform and resolve risks at small and medium-sized financial institutions, promote the reduction in quantity and improvement in quality, and continuously optimize the competitive order and environment of the financial market,” Dong said. Financial institutions need to strengthen self-discipline, abandon an obsession with scale and speed, and prevent “involution-style” vicious competition, he added. More importantly, small and medium-sized institutions should adopt differentiated strategies, return to their core functions, leverage their strengths and avoid weaknesses, and genuinely move toward being “small but beautiful” and “small but capable,” Dong said.

At the level of financial reform, the push to reduce the number and improve the quality of small and medium-sized financial institutions echoes the comprehensive reform of investment and financing in the capital market, Ming Ming, chief economist at Citic Securities, said. In essence, this aims to enhance the allocation efficiency of the financial system through risk clearance and institutional optimization, enabling finance to better support technological innovation and the real economy.

For small and medium-sized financial institutions, reducing quantity is only a means, while improving quality is the ultimate goal, Dong stressed. During the reform process, scientific and effective measures are needed to prevent outcomes in which numbers fall but quality fails to improve, or even declines alongside consolidation.

Editors: Xu Wei, Emmi Laine