Henan protests highlight concerns over China’s rural banking sector

Two weeks after veteran regulator Liu Rong arrived in central Henan province, plainclothes security guards clashed with hundreds of protesters outside a local branch of the People’s Bank of China.

The protesters were desperate to recover around 40 billion Rmb ($5.9 billion) in frozen deposits from four rural banks. Beijing’s deployment of Liu, a veteran of Chinese banking regulation, suggested the central government wanted a quick solution to the impasse.

A day after the rare outbreak of public dissent on July 10, Liu’s team extinguished the flames of unrest by promising to repay funds protesters had lost to fraud – but greater damage had already been done .

Protests in Henan have drawn national attention, in part because local officials manipulated the personal health apps of more than 1,000 depositors to imply they were at high risk for Covid-19 and prevent them from manifest. Five officials linked to the case have been fired or demoted.

While bank deposits should be the safest assets in any financial system, the Henan case – which also involves another bank in Anhui province – has raised concerns about lax regulation in the huge sector. Chinese rural bank and revealed shortcomings in the country’s deposit insurance system.

Rural banking problems, while not considered a systemic financial risk in themselves, have added pressure to an economy reeling from Covid-19, a years-long housing downturn and a broader slowdown in growth.

“We are not worried about rural banks in Henan per se,” said analysts at Citi, the US bank. “However, the situation could worsen if the public starts to worry about other banks, especially some large financial institutions.”

A run on banks began in April after local police opened an investigation into the private company Henan New Fortune, the four institutions’ largest shareholder. They accused a criminal gang led by Lü Yi, owner of Henan New Fortune, of defrauding banks by forging loans and illegally transferring funds.

On July 11, the China Banking and Insurance Regulatory Commission (CBIRC) promised to start reimbursing individual investors with savings of up to Rmb500,000 ($74,000). It will cost around Rmb 20 billion, according to S&P Global Ratings.

The bank runs in Henan province

Plainclothes security guards clash with protesters outside a branch of the People’s Bank of China in Zhengzhou, Henan province © Reuters

April 18

Yuzhou Xinminsheng Village Bank, Shangcai Huimin County Bank, Zhecheng Huanghuai Community Bank and New Oriental Country Bank of Kaifeng stop online cash withdrawals

April 19

Local police open case against Henan New Fortune Group, major shareholder of the four banks, for fraudulent management practices

June 13

Filers find their Henan health code turned red, making them unable to protest

June 30th

Liu Rong, a former top bank watchdog, takes over Henan’s financial regulatory work

July 10

Protest by depositors outside local central bank turns into violent clashes

11 July

Henan authorities release initial repayment plan for depositors

July 20

Banking watchdog vows to launch second round of refunds next week

Regulators hope their approach will appease the vast majority of small depositors. Initial payments will come from recovered criminal funds, regulators said, but it’s not yet clear how the larger accounts will be paid off or who will collect the final check.

Harry Hu, a senior director at S&P, said how regulators resolve the case would have a “profound impact” as an example for other local governments and struggling borrowers.

Many people had deposited less than Rmb 500,000 in each bank to ensure that their savings were protected by the country’s deposit insurance system. However, this scheme has limited reservations compared to other countries, and Chinese authorities have so far been unclear on the classification of the lost money – if they believe it was stolen by fraud. , insurance may not apply.

“As the nature of the missing funds remains unclear at this stage, it is uncertain whether the deposit protection scheme will be triggered,” S&P’s Hu said.

Following the Henan protests, Chinese central bankers downplayed the idea of ​​a systemic threat to the financial system. “Financial risks are largely under control and 99% of our banking assets are within a safe range,” said Sun Tianqi, head of the PBoC’s financial stability office.

Still, PBoC officials also said rural banks remain the most stressed in the country, accounting for a third of the 316 institutions deemed to be at “high risk” in terms of their financial health.

Over the past three years, they have scrutinized smaller banks and their shareholders, focusing on banks lending to their own investors, a practice reminiscent of the savings and loan crisis in the United States in the 1980s.

Since 2019, the CBIRC has been ‘exposing and humiliating’ unscrupulous bank owners, resulting in a slew of mergers in weak regions such as Shanxi and Liaoning, as part of its bid to improve bank governance regional.

Yet the resurgence of fraud in rural banks has left a question mark over the complicity of local regulators and whether the CBIRC has done enough to insulate the system from pervasive moral hazard in an economic downturn. .

Instead, Beijing is accelerating the issuance of special local government bonds to inject capital into smaller banks. A total quota of Rmb 103 billion ($15.3 billion) of these bonds was granted to the provinces of Liaoning, Gansu and Henan, as well as the city of Dalian, during the first half of 2022. The banking watchdog said more bonds would be issued by August.

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