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

Thousands of desperate depositors in China have been fighting for almost two months to recover their savings after a bank run that has raised concerns over the financial health of the country’s smaller lenders.

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

But analysts said an economic slowdown sparked by President Xi Jinping’s zero-Covid policy is also worsening the problems at China’s smaller banks.

The withdrawal problems at Yuzhou Xinminsheng Village Bank, Shangcai Huimin County Bank, Zhecheng Huanghuai Community Bank and New Oriental Country Bank of Kaifeng have prompted rare street protests by angry depositors, many of whom said their life savings were at stake.

“They’re supposed to be bank savings backed by sovereign creditworthiness,” said a depositor surnamed Xu who had saved a total of Rmb93,000 ($13,900) at three of the four troubled lenders. “Now you tell me they’re all gone, I feel nothing but furious.”

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

Although such “high-risk” institutions account for just 1 per cent of total assets in China’s banking system, according to central bank data as of December 2021, bank runs have heightened concerns among regulators of potential risk contagion and social instability stemming from the financial system.

In the Henan province bank runs, authorities accused the largest shareholder of the four banks of using the lenders to illegally raise funds via online platforms.

“The biggest shareholder of the four lenders, Henan New Fortune Group, is suspected of raising funds illegally using online channels and third-party systems in collusion with bank insiders,” the regulator, the China Banking and Insurance Regulatory Commission, told savers last month after a preliminary investigation. It added that the police had opened a case on the matter.

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

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

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

Investors were watching the Henan bank investigation for possible “spillover effects on the financing capability of private banks”, a department manager at a state-owned securities firm said.

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

Under China’s deposit insurance scheme, account-holders will be covered for up to Rmb500,000 if a bank is under financial strain. 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 recapitalise or restructure the lenders.

The CBIRC has in the past repeatedly called for consolidating smaller lenders to defuse risks in the sector.

But some depositors such as Xu have already lost trust in the system. The 39-year-old said he had withdrawn all of his deposits from 10 other small banks that had promised him an annualised yield of more than 4 per cent. “I would rather put the money in the stock market.” Xu said, “At least I’m fully aware of the risk.”

Another depositor, a 30-year-old father, said he had placed more than Rmb900,000 in his village’s banks since 2020 at a return of 4.1 per cent.

“I felt like being slaughtered,” he said, declining to give his name. He drove overnight to negotiate with the banking regulator in Zhengzhou, capital of Henan, in mid-May. “This is 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.

None of the four lenders nor the Zhengzhou branch of CBIRC responded to the Financial Times’ repeated phone calls seeking comment.