Hundreds of disgruntled bank customers in China had been protesting for the last two months who were denied access to their accounts as four rural banks in central province of Henan and one in Anhui were exposed to what is being described as China’s “biggest bank scam”. As the clients of these banks took to the streets to ratchet up pressure on the local governments, the authorities decided to repay individuals with deposits of below 50,000 Yuan from July 22. Later it was decided to repay the clients from the exposed banks with deposits of up to 100,000 Yuan from July 25. Arrangements for those with higher amounts of savings will be subject to further notice.
The bank scam is not isolated or a lone event or first time in China. Bank scams are happening in China. Despite strict regulations the country has 4,000 small and medium sized lenders that collectively control about $14 trillion in assets. However confidence in these banks has waved since 2019, when the government seized a lender for the first time since 1998 and imposed losses on some creditors.
An official probe into the current case found that Henan Xincaifu Group Investment Holding Co., a private investment firm with stakes in the five exposed banks, colluded with bank employees to take deposits and marketed financial products via online platforms, before transferring the money by fabricating lending agreements. Although the police had taken some suspects into custody and seized and frozen funds and assets involved in the case, widespread discount among the people still prevails.
The Chinese authorities are already grappling with shaken confidence of people in its financial system, such occurrences are only aggravating the prevailing lack of confidence. The government of China is taking measures to prevent banks from risky behavior and for maintaining long-term stability of the financial system, but uncertainty still prevails. Although the government support has helped the sinking banks to float, such balancing acts lead to loss of confidence among the people about banks’ ability to survive on their own or state support in the event of liquidity stress. Despite these steps intended to ward off the crisis temporarily, they pose the danger of loss of public confidence in the banks in the long-term.
The Chinese government of late has seen public protests more frequently due to Covid-19 restrictions and people’s protest due to loss of confidence in the financial system since April’ 2022 could only aggravate the situation. As people protested against the recent bank scams, the chinese government deployed people’s liberation Army tanks on Henan streets which according to many observers were a grim reminder of Tiananmen square protests 33 years ago when the student protesters were brutally attacked.
The bank scams do not anger well for the Chinese financial system as well. It has variety of weaknesses. The breakneck speed with which shadow banking has grown in China has its own disturbing aspects. The shadow banking in the country refers to underground financial activity that take place outside the traditional banking regulations and systems. China has one of the largest shadow banking industries with approximately 40% of the country’s outstanding loans tied up in shadow banking activities. Economic analysts warn that shadow banking potentially pose serious systemic risk in the long and short runs.
The chinese shadow banks have provided easy funding to the property market and real estate which has not only led to building more and more apartments which do not find sufficient buyers, but have also pushed up housing prices due to excessive speculation. Higher prices prevent clearance of housing inventory and bad loans build up. Investment in using constitutes More than 70% of asset holding of the Chinese households. In case houses are not delivered timely or people fail to repay loans, there is certainly systemic risk. In fact shadow banking is held responsible for creating real estate bubble in China which has led to unsustainable surge in credit activity. The fear of missing out has stocked the investors’ expectations and many people are now buying property for investment or speculative purposes, which Guo Shuqing, Chairman of the China Banking and Insurance Regulatory Commission termed as “very dangerous.” By 2020, the household debt in China had reached 150% of its disposable income. According to a goldman sachs report, while the total value of houses and developers’ inventory had reached USD 52 trillion in 2019, the amount actually invested in Chinese housing stood at also 1.4 trillion in June 2020. The systemic crisis is already there, it is only a matter of time that the fire engulfs the Chinese financial system.
In 2020, China’s banking sector disposed of 3.02 trillion Yuan ($466.6billion) in non-performing assets according to China’s insurance watchdog. The Chinese banks are still facing severe bad loan pressure, especially due to unsold real estate and economic disruptions cause by the Covid-19 pandemic. China’s debt GDP ratio has risen to 300% and the major part of this debt is in corporate and property sector. One of the most troubling aspects of China’s debt problem is the surge in more opaque and less regulated shadow banking sector.
All these reflect the portends of a financial crisis under the financial system of China and the things may worsen if China fails to contain banking scams happening more frequently in recent times. Chinese government knows it and has issued a list of five sources of online fraud for caution which includes false investment and money management advisors and dodgy loan schemes. Although China has tightened regulations on banking, particularly shadow banking, breaches and dodging still take place. That is a matter of concern for the Chinese government indeed.