Small banks in China are running into trouble. Savers could lose everything

The 45-year-old entrepreneur asked us to call him Peter for security reasons. He’s from the eastern city of Wenzhou and is just one of thousands of depositors who have been fighting to recover their savings from at least six banks in rural provinces in central China.

“I’m close to having a nervous breakdown. I can’t sleep,” Peter told CNN Business.

When he tried to access his accounts online, a statement would pop up on the homepage informing him that the website was under maintenance and services would be unavailable for a while, Peter told CNN Business. Two months later, those services have not been restored.

In China, local banks are only permitted to obtain deposits from their home customer base, but authorities say that “third-party platforms” were used to acquire funds from depositors outside the region. In Peter’s case, for example, his hometown is over 700 miles away from the banks in Henan.

The national banking regulator has accused a major shareholder of the four banks of illegally attracting money from savers. “Henan New Fortune Group, a shareholder of the four village banks, has illegally absorbed the public’s funds through internal and external collusion, the use of third-party platforms, and fund brokers,” the China Banking and Insurance Regulatory Commission told state-run Xinhua News Agency in May.
Depositors protest in front of the Henan branch of the China Banking and Insurance Regulatory Commission, demanding their money back after their funds were frozen.

“The police have opened a case for investigation into the matter,” it added.

Runs on small Chinese banks have become more frequent in recent years and some have been accused of financial improprieties or corruption. But experts worry that a much bigger financial problem could be looming, caused by fallout from a real estate crash and soaring bad debts related to the Covid-19 pandemic.

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There are no official estimates yet on the total amount of funds that bank depositors are unable to withdraw. CNN Business did not receive a comment from the local police or the national banking regulator.

As many as 400,000 banking customers across China were unable to access their savings, according to an estimate in April by Sanlian Lifeweek, a state-owned magazine.

That’s a drop in the ocean of China’s vast banking system, but about a quarter of the industry’s total assets are held by around 4,000 small lenders, which often have opaque ownership and governance structures and are more vulnerable to corruption, say experts, and the sharp economic slowdown.

“The scope of the bank scandals where bank officials embezzle and steal funds from depositors is alarming, and what is exposed could only be the tip of the iceberg,” said Frank Xie, a professor at University of South Carolina Aiken who studies Chinese business and the economy.

“As the Chinese economy slows down further, the fiscal shortage worsens, and the debt repayments become more widespread among Chinese companies, especially in the real estate sector, bank runs could become more often and on a larger scale,” he said.

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Many savers have had enough. Late last month, hundreds of depositors traveled to Zhengzhou, the capital of Henan, to protest outside the office of the banking regulator and to demand their money back, to no avail.

Another protest was planned in June. But as the depositors arrived in Zhengzhou, they were stunned to find that their health codes — which were green upon departure — had turned red, according to six people who spoke with CNN and social media posts. Anyone with a red code — usually assigned to people infected with Covid or deemed by authorities to be at high risk of infection — immediately becomes persona non grata.

They are banned from all public venues and transport and are often subject to weeks of government quarantine.

CNN has reached out to the Zhengzhou government for comment. The Henan Provincial Health Commission told state-run news website it was “investigating and verifying” the complaints from depositors who received red codes.

What’s behind the problem in Henan

In Henan, the China Banking and Insurance Regulatory Commission has put the blame on the private investment firm that holds large stakes in all four lenders.

Last week, the Henan police said that a criminal gang headed by the investment firm’s controller “has been suspected of using village banks to commit serious crimes.” Police say several suspects have been arrested.

The Henan New Fortune Group no longer has a website. CNN tried to reach the company for comment on the phone and by email without success. The company has made no public statements and it’s believed to have been annulled.

Later on Monday, the four Henan banks said they would start collecting information from customers who have been affected by the shutdown of their online transaction systems. The move was required by financial regulators, the banks added in separate statements on their website,…

Read More: Small banks in China are running into trouble. Savers could lose everything

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