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Explained: Why are bank runs rising in China?

Depositors of four rural banks in Henan province have not been able to withdraw their funds since April. Sporadic protests have been going on since May.

Demonstrators hold banners during a protest over the freezing of deposits by rural-based banks, outside a People's Bank of China building in Zhengzhou, Henan province, July 10, 2022. (Reuters)

In a rare large protest in China, over one thousand angry bank depositors, who have been protesting for access to their frozen funds, faced off with the police in Henan province leading to a violent clampdown Sunday.

Depositors of four rural banks in this central province have not been able to withdraw their funds since April. Sporadic protests have been going on since May.

After Sunday’s protest, China’s banking regulator announced that customers – with deposits up to 50,000 yuan – will start getting their money back beginning Friday. The arrangement to repay others is yet to be announced. What led to the cash crisis at these rural banks, and what it indicates about the Chinese economy?

What are bank runs, and why is China witnessing them?

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A bank run occurs when a large number of depositors rush to simultaneously withdraw their money as they no longer consider it safe with the financial institution. Bank runs among China’s small lenders have been rising over the last few years. While Henan protests are the latest to hit the headlines, at least two small lenders had witnessed a rush for withdrawals in 2019, and five lenders were hit by bank runs in 2020, according to Reuters. In most of these cases, police had to step in to calm depositors.

In this photo released by Yang on July 10, 2022, people stage a protest at the entrance to a branch of China’s central bank in Zhengzhou in central China’s Henan Province. (AP/PTI)

China has around 4,000 rural lenders, and economists blame shrinking of economic activity amid stringent Covid curbs, opaque ownership and poor corporate governance at these institutions to have exacerbated the crisis of customer trust in Chinese financial institutions. The China Banking and Insurance Regulatory Commission (CBIRC) has been  calling for consolidating assets of small lenders to defuse risks.

Why are depositors in Henan province protesting?

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The protests began soon after four rural banks in Henan froze withdrawals on April 18. The frozen deposits add up to $1.5 billion, according to Chinese media reports. Initially, these banks — Yuzhou Xin Min Sheng Village Bank, Shangcai Huimin County Bank, New Oriental Country Bank of Kaifeng and Zhecheng Huanghuai Community Bank – told their customers that withdrawals had been stopped due to internal maintenance. Later, it emerged that the banks were at the centre of a financial fraud probe.

The customers of two other rural banks in neighbouring Anhui province were also impacted by the freeze.

What led to the cash crisis at rural banks in Henan?

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The CBIRC has accused Henan New Fortune – a major shareholder in these rural banks – of illegally attracting money from citizens using third-party platforms.

China does not allow local banks to take deposits from customers outside their home base.

In May, the banking regulator told state-run Xinhua news agency that “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”.

In the present case it is being alleged that these banks attracted deposits by offering attractive terms and high interest rates. A report in the South China Morning Post in May said that while Bank of China offers 2.75% a year interest on five-year deposits, the found banks in question were giving around 4.5% a year on their deposit products through third-party platforms.

Also, a statement by the Henan police on July 10 said that a criminal group had gradually taken control of several rural banks and was moving out funds.

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What does this crisis mean for China?

Anger triggered by rising bank runs could become an irritant for the government. A Bloomberg report said that a spillover into the broader Chinese banking sector was an unlikely possibility as rural banks make up a small part of the industry’s total assets. However, instability stemming from the financial system could turn into a spot of bother. President Xi Jingpins only recently underlined the importance of maintaining economic and social stability, and making citizens feel reassured on China’s road to pandemic recovery.

First published on: 12-07-2022 at 07:10:30 pm
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