Henan Banking Mess Raises Stability Concerns

THIS BYSTANDER BELIEVES that there is more to be discovered about the banking scandal in Henan that led to violent clashes between depositors and police on Sunday and now to financial regulators ordering the banks involved to start releasing funds to their depositors.

Earlier this month, hundreds of depositors in four rural banks in Henan had the health codes on their smartphone apps used to enforce Covid-19 quarantines suddenly turn red, despite testing negative for Covid-19. Five local officials were subsequently disciplined for a brazen effort to stop the disgruntled depositors from travelling to the provincial capital Zhengzhou to petition authorities for redress.

The scandal had come to light in mid-April after the four rural banks and another in neighbouring Anhui suspended their online banking services and froze an estimated 400,000 customers out of their accounts containing tens of billions of yuan. The purported reason was for the banks to conduct a systems upgrade, one that seemingly never ended. 

Depositors at Yuzhou Xinminsheng Village Bank, Shangcai Huimin County Bank, Zhecheng Huanghuai Community Bank and New Oriental Country Bank of Kaifeng in Henan province and Guzhen Xinhuaihe Village Bank in the neighbouring Anhui province were affected. 

In May, banking regulators launched an investigation into Henan Xincaifu Group Investment Holding, a private investment firm with stakes in the rural banks involved. By then, (peaceful) protests demanding the accounts be unfrozen had started to be held outside Zhengzhou offices of the China Banking and Insurance Regulatory Commission (CBIRC).

At the start of this week, police arrested what were described as members of a ‘criminal group’ said to be involved in taking over the rural banks and making illegal transfers through fictitious loans. Authorities say they are looking for a man identified as Lu Yi, accused of being the mastermind who controls Henan Xincaifu.

Bank deposits of up to 500,000 yuan ($73,500) per depositor per bank are covered by deposit guarantees, although there is some ambiguity over which rural bank accounts are protected. Nonetheless, the CBIRC says that bank customers with up to deposits of 50,0000 will be repaid from July 15.

It is not yet clear what will happen to deposits of more than 50,000 yuan, although the CBIRC has said it will not reimburse accounts with a whiff of suspicion about them.

This has the look of a central government bailout, perhaps buy-off would be more accurate. It is difficult to escape the thought that, however described, the action was prompted by fears of bank runs on other small lenders and the threat to social stability they would pose.

China has some 4,000 rural banks, many of which have one foot in the murky world of shadow banking and whose ownership structures allow shareholders to gain significant control without regulatory approval and put themselves in a position to syphon off cash through loans.

Bank regulators have been tightening up on rural banks for more than a year. The Henan banks scandal will likely lead to a further turning of the supervisory screw. 

In the Henan banks case, one question is whether local officials or regulators were turning blind eyes to whatever was going on, and whether they were benefiting from it.

With central government putting a premium on economic and social stability, this could easily become an exemplary case to demonstrate how local officials are now expected to have ditched the old ways. Protestors’ banners accusing the provincial authorities of corruption that appeared last weekend will be disconcerting to Beijing.

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