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  • Jul 26, 2014
  • Updated: 12:45am
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BANKING

Rural mini-bank run highlights perils of deregulation in China

Fraud at co-ops set up to provide aid to farmers exposes loopholes that enable risky lending

PUBLISHED : Thursday, 06 March, 2014, 4:01pm
UPDATED : Friday, 07 March, 2014, 12:39am
 

Depositors wanting to withdraw money from a rural bank in prosperous Jiangsu province before the Lunar New Year holiday found the doors locked, their money gone and employees offering a simple explanation.

"We have lent out all the money. There is none left," an employee said.

In the run-up to the holiday in late January, word had spread that at least three rural co-operatives were running short on funds. In what the local government described as a "panic", depositors rushed to withdraw cash. Local officials say several co-op bosses fled after committing fraud.

The incident highlights the risk that financial liberalisation, intended to channel more credit to farmers and others who struggle to access loans from big state banks, could open regulatory loopholes that enable a surge in risky lending.

"The core problem is, after using this [co-op] structure to raise funds, effective regulation is lacking," said Chen Ping, a director of the Farmers' Credit Co-operative Union, an association of researchers studying rural co-ops. "Actually a large amount of funding has been shifted into large-scale projects like real estate."

Depositors would normally be protected by the banking regulator, which requires lenders to keep a certain amount of cash on reserve to meet depositor demand. But as participants in a pilot programme, the depositors quickly woke up to an unpleasant reality: "farmers' mutual help funding co-operatives" are not technically banks.

Not only did they not have sufficient reserves on hand, they were not legally required to.

Officials in Yancheng told state media the situation would be resolved before the holiday, but two of at least three co-ops that closed their doors before the holiday have remained locked.

In an e-mailed statement, the propaganda department of Tinghu district in Yancheng said 18.3 million yuan (HK$23.2 million) had been returned to depositors of three troubled co-ops before the Lunar New Year. That is a fraction of the 80 million yuan the state media previously reported had gone missing.

Farmers' co-ops began appearing in Jiangsu in 2006, after the Communist Party issued guidelines encouraging the establishment of innovative rural financial institutions as part of a broader "new socialist countryside" campaign.

Rather than the China Banking Regulatory Commission, local agriculture affairs offices, with little experience of financial regulation, were tasked with supervising farmers' co-ops.

The idea was to allow farmers who knew one another to co-operate on financing as well as work together on production.

By the middle of last year, 137 such co-ops had been established in Yancheng, with membership reaching 170,000, deposits of 2.3 billion yuan and loans outstanding of 1.9 billion yuan, according to figures cited by official media.

In practice, many co-ops shifted into riskier forms of lending, serving small factory owners and real estate developers who often cannot obtain bank loans.

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