Chinese authorities step in amid banking crisis in Henan

Authorities in China’s Henan province said on July 11 they will start repaying customers whose deposits have been frozen by four rural banks at the centre of a banking crisis.

The latest announcement came a day after local authorities quelled a protest over the frozen funds at a branch of China’s central bank in Zhengzhou, Henan’s capital.

In a statement, the Henan Banking and Insurance Regulatory Bureau and the Henan Provincial Local Financial Supervision Bureau said “advance payments” will be made in batches via a local association to individuals or firms with a deposit of under 50,000 yuan (around $7,440) at the four banks from July 15.

Those with a deposit of more than 50,000 yuan will be paid “gradually” and arrangements will be announced separately, the authorities say.

Customers of Yuzhou Xin Min Sheng Village Bank, Zhecheng Huanghuai Community Bank, Shangcai Huimin County Bank and New Oriental Country Bank of Kaifeng can register online from 09:00 local time this Friday.

But the regulators said funds that are involved in illegal or criminal activities will temporarily not be repaid.

Ting Lu, chief China economist at Nomura, says the authorities’ decision to repay affected depositors would be a “good solution” to the crisis.

He says the amount of advance payments – up to 50,000 yuan for each depositor – should be enough to help most of them, judging from the estimated size of their overall exposure to those banks.

But Lu adds the incident reveals regulatory problems in the local banking system, arguing that there is room for the local governments and regulators to improve relevant regulations.

People began having difficulties withdrawing cash from their accounts at the banks from April. The four banks issued similar notices saying they had to “upgrade” their systems and suspend their online banking services.

With firms unable to pay their workers and people locked out of their savings accounts, many flocked to Zhengzhou to join sporadic protests over the past months, demanding that they get their money back.

The morning of July 10 saw one of the largest protests yet, with hundreds of protesters gathering at the local People’s Bank of China branch.

They held up banners and chanted slogans, demanding the banks unfreeze their accounts, according to a number of reports in international and Chinese media.

But what had begun as a peaceful protest soon descended into chaos, as local police clashed with the crowd in a clearance operation. Protesters pelted police officers with water bottles and other objects as the authorities charged the crowd, according to AP. Security officers beat and arrested some protesters during the scuffle, CNN reported.

Video footage circulating online also showed unidentified men, many dressed in white, shoving and dragging away some protesters at the rally.

Zhengzhou authorities did not immediately comment on the protest, but police in nearby Xuchang city said late Sunday that authorities had arrested more suspects in connection with a scheme to gain control of banks in Henan. The authorities said they had frozen some funds linked to the case and investigation is ongoing.

Police said a “criminal gang” led by a man named Lu Yi had effectively taken control of several local banks via a company called Xincaifu Group starting in 2011.

The gang took control by “manipulating senior executives at the banks” and buying up shares, the authorities said.

The police said the group also illegally transferred funds from the banks using “fictitious loans” and by selling financial products using different platforms.

Health code scandal

In June, some affected depositors travelling to Zhengzhou in hopes of getting their money back were reportedly barred from moving within the city, because their health codes had suddenly turned red – meaning that authorities considered them to be a health risk.

Some depositors originally planning to protest were taken to a quarantine hotel immediately upon arrival, before being sent away on trains bound for their hometowns, according to CNN.

The incidents raised questions over whether local authorities had been tampering with the health code system to prevent people from petitioning for their rights.

Deposit insurance

It is unclear how much funds have been frozen at the affected banks, but the figure is believed to amount to around 40 billion yuan, according to several media reports.

The four rural banks were all covered by China’s deposit insurance scheme as of the end of March, data published by the PBoC shows. More than 4,000 deposit-taking institutions had bought insurance under the scheme.

China first set up its deposit insurance scheme in May 2015. Under the law, the insurance limit per depositor is 500,000 yuan. But the PBoC can change the limit with approval from the State Council, depending on “the economic situation, changes in the deposit structure, and financial risk status”.

The fund had a balance of 96 billion yuan by the end of 2021, compared with 62 billion yuan a year ago.