A Too-Big-to-Fail Toxic Monster. China's Plan C?

China’s small bank problem may be about to get a lot bigger. The slowing economy is exposing vulnerabilities built up by years of aggressive lending — and Beijing’s plans to preserve stability by merging weak lenders with each other could end up creating an even worse headache.

The country’s hundreds of rural commercial and city lenders account for 27% of banking assets, but their influence is far larger than this because of their web of connections to the wider system. Small banks are significant players in the interbank market, relying on larger lenders for funding. They are active in selling wealth management products, through which companies raise financing and individual savers seek returns. And their bonds are widely held by insurance companies.