The phenomenon of urban shrinkage occurs not only in large and medium cities, but also in small towns. Small town shrinkage comprises the core element of China’s urban shrinkage, and is affected by both regional and local factors. However, this shrinkage phenomenon has not yet attracted extensive academic attention. Therefore, we studied small towns in Northeast China in order to identify the patterns and distribution characteristics of small town shrinkage from 2004 to 2017. To understand the urban shrinkage of small towns in China, we constructed a hierarchical linear model with multi-level influencing factors to analyze the effects of county-level and town-level factors. The results showed the shrinkage to be widespread in all regions of Northeast China. Towns with small populations and at a lower tier administrative level were more likely to shrink. The function types of shrinking towns were mainly agricultural product distribution centers, industrial, and resource-based. The results also showed that county-level factors had significant cross-level effects on shrinking towns. These findings contribute to our understanding of urban shrinkage from the perspective of multi-level geographic spaces, and provide a reference point for policy makers engaged in sustainable town development.