They risk losing their life savings, what is happening inside the Chinese banking industry?
Peter deposited about $6 million of his life savings in three small banks in China’s Henan province. He said he has not been able to access his money since April.
45-year-old businessman Peter (real name has been changed) is from Wenzhou city, eastern China. He is just one of thousands of people struggling to withdraw their savings from at least six banks in rural central China.
“I’m about to have a nervous breakdown. I can’t sleep,” Peter told CNN Business.
When he tried to access his online banking account, a message popped up on the homepage saying the website was under maintenance and the services would be unavailable for a while. Two months later, those services still have not been restored.
The trouble started in April, when four banks in Ha Nam suspended cash withdrawals. In China, local banks are only allowed to accept money from customers living in the area. But authorities said that a “third platform” was used to receive money from people from elsewhere. For example, in the case of Peter, his hometown is more than 1,126km from the bank in Ha Nam.
The national banking regulator accused a major shareholder of four banks of illegally soliciting money from savers.
The China Banking and Insurance Regulatory Commission (CBIRC) told Xinhua news agency: “Henan New Fortune Group, a shareholder of four banks, illegally siphoned money from the public through internal collusion. and externally, using third-party platforms and brokers”. The commission added that the police had opened an investigative case on the matter.
In recent years, the race between small banks in China has become more frequent. Some banks have also been accused of financial misconduct or corruption.
Experts fear that a much larger financial problem is lurking. That problem is related to the collapse of the real estate sector and high bad debts because of the Covid-19 pandemic.
There is currently no official estimate of the total amount of deposits people cannot withdraw. According to an estimate by Sanlian Lifeweek magazine in April, 400,000 customers across China have been unable to access their savings.
Although that number is like salt in the vast Chinese banking system, about a quarter of total industry assets are held by 4,000 small banks. These banks are often not strictly regulated, more prone to corruption and thereby cause a sharp economic downturn.
Frank Xie, a professor at the University of South Carolina Aiken who studies the Chinese economy, said banking scandals such as official embezzlement and theft of depositors’ funds were alarming. What is revealed may be just the tip of an iceberg.
“As China’s economy slows down, financial difficulties are getting worse and it’s becoming more common for Chinese companies to repay loans, especially in the real estate sector,” he said. . Massive withdrawals will take place more frequently and on a larger scale.”
Late last month, hundreds of savers went to Zhengzhou, the capital of Henan, to claim their money back, but to no avail. Another protest is planned for June. But when they arrived in Zhengzhou, all were shocked when their health codes were changing from green to red. In China, people with a red code are people infected with Covid-19 or considered to be at high risk of infection. Therefore, they must follow epidemic prevention measures.
Depositors protested in front of the CBIRC branch in Henan to demand their money back because the system was frozen.Photo: CNN
What ‘s happening in Henan, China
CBIRC considers private investment firm Henan New Fortune Group to be at fault. Last week, Henan police said a criminal group led by a company operator suspected of using local banks to commit serious crimes.
Four banks in Ha Nam said they would collect information about customers affected by the online transaction system’s inactivity and did not explain further.
In the event of a bank failure, depositors will receive a security deposit of 500,000 yuan (nearly $75,000). But for someone like Mr. Peter, that money doesn’t count. If the government investigates and finds out that these transactions are illegal, the depositors will lose everything.
“I’m quite worried about how the authorities handle our money,” said Ye, who revealed only his last name. Ye is a 30-year-old worker from Dongguan city, Guangdong province, about 1,500km from his bank in Henan.
Ye sent a total of 160,000 yuan ($24,000). He said the bank had promised that the deposit products were legal and that customers would be protected by a deposit insurance scheme.
Currently, four banks, Yuzhou Xinminsheng, Shangcai Huimin, Zhecheng Huanghuai and New Oriental Country Bank of Kaifeng have not yet commented on this issue.
In early 2021, Beijing banned banks from selling deposit products through third-party online platforms, over concerns that the expansion of the fintech sector increased risks in the major financial system. than. The PBOC calls such activities “illegal financial activities”.
So why do local banks in Henan seem to ignore the ban and raise deposits from distant customers? CBIRC says third-party online platforms allow them to bypass geo-restrictions to expand their business.
In Henan, various state media reported that deposit products were sold through affiliated platforms or owned by tech giants such as Baidu (BIDU) and JD.com. (JD).
“The core problem is that China’s financial system is expanding too quickly relative to the size of the economy over the last decade,” said Logan Wright, director of China market research at Rhodium Group.
Since 2008, China’s banking sector has grown sixfold in size, with total assets reaching more than $50 trillion, according to government statistics.
Experts say small banks rely more on deposits for funding than large banks. Many banks offer high interest rates to attract bank deposits.
But as the economy slows, borrowers struggle to repay their loans. Banks have difficulty paying the bank interest as offered to savers.
Investors are closely watching the government investigation into bank withdrawals in Ha Nam. Analysts assess the possible consequences for other banks.
Magnus from Oxford University said: “The economy is a key reason why affected banks can be in trouble. Other banks, even the big ones, are also at risk. chance of being affected, as the fate of the real estate market and real estate prices are in equilibrium”.
China’s economy is struggling while dealing with the epidemic. Many cities have been in full or partial lockdown since March. Analysts fear that the economy will shrink in the second quarter.
Experts are not yet worried about a financial crisis, as the PBOC has the ability to guarantee large banks. But public discontent can be a major concern for the government.