Banking crisis in China: Authorities try to stem anger over frozen deposits

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CNN Business

Chinese authorities will begin reimbursing bank customers whose accounts have been frozen for months, following some of the biggest protests the country has seen since the start of the pandemic.

Customers of four rural banks in the central province of Henan, and one in neighboring Anhui Province, will be reimbursed by the authorities from Friday, according to statements Monday night by provincial financial regulators.

The first payments will be sent to customers with a combined amount of less than 50,000 yuan ($7,445) on deposit at a single bank, they said. Separate arrangements will be announced in due course for customers with more than that on their accounts, authorities added.

The rural funds have still not given a clear explanation why and for how long the funds will remain frozen. In May, the national banking regulator said that a majority shareholder of Henan banks was responsible for illegally luring money from savers through online channels.

Refunds will be handled by two other banks, but regulators did not say where the funds would come from.

The announcements come after a mass protest on Sunday in the city of Zhengzhou, Henan province, was crushed violently by the authorities. It was the biggest protest ever by the depositors, who have been fighting for months to recover their frozen savings.

A 45-year-old entrepreneur from Wenzhou in eastern Zhejiang province told CNN Business last month that he had been unable to access a penny of his family’s $6 million savings.

Runs on smaller Chinese banks have become more frequent in recent years and some have been accused of financial irregularities or corruption. But experts fear a much bigger financial problem is looming, caused by the fallout from a property crash and soaring bad debts linked to the Covid-19 pandemic.

As many as 400,000 customers across China have been unable to access their savings at rural banks in Henan and Anhui provinces, according to an April estimate by Sanlian Lifeweek, a public magazine.

It’s a drop in the ocean of China’s vast banking system, but around 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 and a sharp economic downturn.

Henan police said on Sunday they had arrested a number of suspects, accusing them of using rural banks to illegally solicit public funds since 2011.

Despite police action and the decision to reimburse some depositors in the coming days, analysts warn that the crisis may not be over yet.

“The situation continues to evolve,” Betty Wang, senior China economist at ANZ, said in a note to clients on Tuesday.

“Despite the small size of the assets involved, the social impact of the incident could be significant if not handled appropriately. It could also trigger a new round of regulatory tightening,” she said. . adding that Beijing could launch a new round of investigations into the online banking sector, village banks or “potential local corruption”.

Monday’s statements are the first pledge from Chinese authorities to repay the frozen funds.

However, many customers have far more than 50,000 yuan stuck in these banks, Wang said, and they remain in the dark about the future of their savings.

The plan also has other exclusions.

No payments will be made to customers who have deposited funds with banks through “other channels with high interest rates” or who have violated the laws and regulations, authorities said. But they gave no details, leaving the grievances of many victims seemingly unaddressed.

In Henan and Anhui affairs, the Chinese State-run media reported that the savings products were offered to customers through online platforms affiliated with or owned by Chinese tech giants such as Baidu (BIDU) and (JD)

In China, local banks are only allowed to take deposits from their local customers, but it has become common in recent years for many smaller banks to partner with online platforms and attract funds across the country.

In early 2021, Beijing banned banks from selling deposit products through online platforms, fearing that the rapid expansion of the fintech sector would increase risks in the wider financial system.

But savers CNN spoke to say banks told them the deposit products were legal and were protected by the deposit insurance scheme.

“If the incident is determined to be financial fraud or the accounts involved are not strictly savings deposits, they may not be under the protection of the deposit insurance system,” Wang said.

In China, deposits of up to 500,000 yuan (nearly $75,000) are guaranteed in the event of bank failures, but if the government’s investigation finds that these cases involved “non-compliant” transactions, people could lose everything .

Social discontent resulting from the incident could be a significant issue for the government.

Worst hit are low-income farmers who have deposited almost all of their savings, Wang said.

“They view banks as the safest place backed by sovereign solvency. Inappropriate handling of the issue could lead to social unrest and threaten stability,” Wang said.

“This may be particularly sensitive following local shutdowns and ahead of the 20th Party Congress,” she added.

– CNN’s Beijing bureau, Jorge Engels in London and Nectar Gan contributed reporting.

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