Runs on Chinese local banks spark fears over health of regional lenders

Thousands of desperate depositors in China have been battling for nearly two months to get their savings back after a bank run that raised concerns about the financial health of the country’s small lenders.

Authorities blamed fraudulent management practices for the crisis, which was sparked by the sudden suspension of cash withdrawals from four lenders in Henan, one of China’s most populous provinces, on April 18.

But analysts said an economic slowdown triggered by President Xi Jinping’s zero Covid policy is also compounding the problems for China’s smaller banks.

Withdrawal issues at Yuzhou Xinminsheng Village Bank, Shangcai Huimin County Bank, Zhecheng Huanghuai Community Bank and New Oriental Country Bank in Kaifeng have prompted rare street protests from angry depositors, many said their savings were at stake.

“They are supposed to be bank savings backed by sovereign creditworthiness,” said a depositor named Xu who had saved a total of Rmb93,000 ($13,900) from three of the four troubled lenders. “Now you tell me they’re all gone, I only feel fury.”

Bank runs have increased among China’s 3,902 regional lenders in recent years. The health of the country’s smaller banks has come under scrutiny since regulators took control of Baoshang Bank, a regional institution in Inner Mongolia, in 2019, citing “serious credit risk” and its link to a arrested tycoon, Xiao Jianhua.

Although these “high risk” institutions represent only 1% of the total assets of the Chinese banking system, according to central bank data in December 2021, bank runs have increased regulators’ concerns about potential risk contagion. and social instability resulting from the financial crisis. system.

In banks in Henan province, authorities accused the four banks’ major shareholder of using the lenders to illegally raise funds through online platforms.

“The main shareholder of the four lenders, Henan New Fortune Group, is suspected of illegally raising funds using online channels and third-party systems in collusion with banking insiders,” the regulator, the China Regulatory Commission, said. from banks and insurance, to savers last month. after a preliminary investigation. He added that the police had opened a file on this.

Local banks often market deposits beyond their official regions through online platforms, such as the fintech branches of Baidu and 360 DigiTech. But it has exacerbated liquidity problems for lenders in poorer regions as they are generally unable to generate enough interest income on loans to match the rates they pay depositors.

Banking regulators banned banks from making online sales to third parties in early 2021, citing potential financial risks, but many rural banks have developed their own online channels.

The structural weakness of these institutions had worsened “with the economic downturn and the impact of the Covid-19 pandemic”, said Wang Yifeng, an analyst at Everbright Securities.

Investors were watching the investigation into Henan Bank for possible “ripple effects on the funding capacity of private banks”, said a department director of a state-owned securities firm.

For local and central governments, the problem is how to impose financial discipline on banks without causing social instability.

Under China’s deposit insurance system, account holders will be covered for up to Rmb 500,000 if a bank is in financial difficulty. But they face the possibility of losing their savings if the regulator’s investigation classifies their claims as “fraudulent”. Local governments and outside investors could also step in to help recapitalize or restructure lenders.

The CBIRC has in the past repeatedly called for the consolidation of smaller lenders to defuse risk in the sector.

But some applicants like Xu have already lost faith in the system. The 39-year-old said he withdrew all of his deposits from 10 other smaller banks that promised him an annualized return of more than 4%. “I prefer to put the money in the stock market.” Xu said, “At least I am fully aware of the risk.

Another depositor, a 30-year-old father, said he had placed more than 900,000 Rmb in banks in his village since 2020 with a return of 4.1%.

“I felt like I was shot,” he said, declining to be named. He drove into the night to negotiate with the banking regulator in Zhengzhou, capital of Henan, in mid-May. “It’s the money my wife and I have saved together since we got married. I had to lie to her that I was away for work,” he said.

Neither of the four lenders nor the Zhengzhou branch of the CBIRC responded to repeated phone calls from the Financial Times seeking comment.

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