China’s bank runs highlight abuse among small-bank shareholders, despite crackdown
- ‘The whip didn’t really hit the right places’, state media says
- At the heart of the issue is the opacity of small banks’ shareholding structure, which has allowed shareholders to amass stakes in the banks without regulatory approval, while also using the lenders to secure loans
An ongoing cash crisis in China’s central Henan province highlights the difficulties facing the nation’s regulators in their effort to clean up the country’s weak small rural lenders amid growing economic pressure and a poor outlook for the small-bank sector.
Since mid-April, thousands of depositors have been left in the dark as to the whereabouts of their savings at four rural banks in Henan.
Local media cited the China Banking and Insurance Regulatory Commission (CBIRC) last month as saying a probe had found that Henan Xincaifu Group Investment Holding, a private investment firm with stakes in all four lenders, colluded with bank employees to illicitly attract public funds via online platforms, resulting in the deposits being frozen.
A series of protests have since broken out Henan’s capital, Zhengzhou, with savers demanding back their money – estimated to be billions of yuan, according to depositors.
“Some small and mid-sized banks were put together quickly, and some have ulterior motives such as making loans to themselves. Governance is a problem. Risk control is another problem,” said Joe Zhang, the author of 2013’s Inside China’s Shadow Banking: The Next Subprime Crisis, who also worked at China’s central bank in the 1980s.
There are more than 4,000 small banks in China that broadly include city commercial banks and rural banks, many of which have been built to serve local economies. However, as competition grows, they have struggled with shrinking deposits while non-performing loans have been on the rise.