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People protest in front of the Henan branch of the China Banking and Insurance Regulatory Commission, chanting “return our money”. Photo: Weibo

Chinese police make arrests in Henan banking scandal that has put spotlight on financial risks

  • Police have arrested the ‘first batch’ of suspects and frozen assets related to a cash crisis at rural banks in Henan and Anhui
  • The case has highlighted the vulnerability of lenders in China’s less-developed regions as the risk of recession grows

Police in central China’s Henan province have arrested a number of suspects allegedly involved in a “complicated” cash crisis involving rural banks, while investigators continue to search for the whereabouts of customers’ missing deposits.

The arrests come after months of protests from anguished savers, who have been unable to withdraw cash from their accounts at small rural banks in Henan and Anhui provinces.

The case has highlighted the vulnerability of lenders in China’s less-developed regions as the risk of recession grows in the world’s second largest economy.

Police in Xuchang city, Henan, announced a breakthrough on Saturday in the banking scandal, which involves billions of yuan worth of deposits, by arresting the “first batch” of suspects and freezing related capital and assets.
The case involves long lasting crimes, numerous suspects and complicated plots
Xuchang police

The rural banking crisis allegedly revolves around a private investment firm called Henan Xincaifu Group Investment Holding – which was controlled by a man surnamed Lu which police began investigating in April.

Public records show the company, which had stakes in numerous rural banks and shadow companies, closed in February.

Police have accused Lu of illegally manipulating and taking advantage of online transactions at these rural banks.

“The case involves long lasting crimes, numerous suspects and complicated plots,” the police announcement said.

The case gained further publicity when victims of the financial scandal found they could not join planned protests because their health QR codes had been turned red, reigniting fears that the large-scale data collected for contact tracing is being abused.

The Henan Banking and Insurance Regulatory Commission and the local Financial Supervision and Administration said authorities at all levels would closely work with the police to investigate the whereabouts of the missing funds.

China’s rural banks, which are often the key financiers for farmers and small businesses in less-developed regions, are seen as a weak link during economic downturns and are more susceptible to risks when deposits shrink and non-performing loans build up.

“Right now, the small- to medium-sized rural banks are still facing challenges when it comes to sustainable development,” said a note by Everbright Securities late last month.

“In some parts of the country, the aggregate risks are still large; it will require a bigger effort to tackle.”

‘Optimise’ zero-Covid or risk investment, says ex-finance minister

The brokerage said that coronavirus outbreaks and various economic factors will bring some problems to the surface.

In April, China’s Politburo, the centre of power within the Communist Party, stressed the need to control systemic risks to the economy and financial sector.

Beijing has launched a crackdown on corruption in the nation’s financial sector, which has ensnared high-profile officials at financial institutions and regulatory agencies.
Cai Esheng, the former deputy chairman at the banking regulator who retired in 2013, was arrested in February on charges of abuse of power.