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Victims of one of China’s worst financial scandals attacked by unidentified men in white at protest

Victims of one of China’s worst financial scandals attacked by unidentified men in white at protest

China’s cash crisis culprit named by police, said to have run powerful criminal gang since 2011

  • Banking crisis in Henan and Anhui provinces has left thousands of China’s rural residents cut off from their savings for months, sparking protests and a violent response
  • Suspect and his criminal gang proliferated since 2011, and the financial fallout threatens to undermine China’s social stability and public order
Police in Henan province have shed new light on the alleged culprit behind arguably one of China’s largest financial scandals, in which billions of yuan worth of deposits – comprising the savings of thousands of people – were frozen in rural banks.

The dire situation has highlighted the financial risks facing lenders and savers in China’s less-developed regions, and the underlying threat this poses to public order.

After months of lamenting from the masses of anguished savers unable to withdraw cash from their accounts at small banks in Henan and Anhui provinces, authorities with the Xuchang Public Security Bureau in Henan said their investigation into the crisis was “progressing in an orderly manner”, and they identified a man still being sought by police.

“It is now further confirmed that, since 2011, a criminal gang led by the criminal suspect Lu Yi has used the Henan Xincaifu Group to have effectively controlled several rural banks, by ways of cross-shareholding, increasing capital and shares, and manipulating bank executives, among other means,” Xuchang police said in a statement on Sunday.

White-shirted group attacks protesters at China bank scandal demonstration

Police added that the gang also used third-party online financial platforms, its own platform, and a number of capital brokers to attract deposits and promote financial products.

In addition, the gang illegally transferred funds by means of fictitious loans, and set up a company to delete and meddle with data, which includes a series of serious crimes, police said.

“Recently, [police] arrested a batch of suspects and have seized and frozen funds and assets involved in the case,” the statement said. Xuchang police said last month that they had arrested the “first batch” of suspects in relation to the case, but it was not made clear on Sunday how many people have been arrested so far.

The latest announcement followed a protest that broke out on Sunday morning after tensions had been building since the scandal emerged in mid-April. An estimated 1,000 depositors gathered in front of the Zhengzhou sub-branch of the People’s Bank of China. Protesters were surrounded by local police and were recorded being beaten by unidentified men in white shirts.

China tells banks to support rural infrastructure, but don’t add to hidden debt

Deposits at Yuzhou Xinminsheng Village Bank, Shangcai Huimin County Bank, Zhecheng Huanghuai Community Bank and New Oriental Country Bank of Kaifeng have been frozen since April 18, sparking a number of protests in Zhengzhou, Henan’s capital.

The financial crisis not only calls attention to the increasingly vulnerable financial situation in underdeveloped regions amid growing recession risks, it also threatens to undermine China’s social stability and public order, especially with the online circulation of photos and videos showing the violent suppression of protesters.

Enodo Economics, a macroeconomic and political forecasting company in London, said in a note on Sunday that the current problems facing some of China’s small banks are not likely to lead to a collapse of the banking system.

“But in the People’s Republic of China, whose citizens have no chance to express views through the ballot box, domestic bank runs can signal falling confidence in the system [President Xi Jinping’s] tops,” Enodo Economics said.

Why are China’s small rural banks important?

According to a report by Chinese media outlet Yicai Global, which cited official court documents that were later removed from public view, alleged gang leader Lu Yi back in 2004 secured 30-year franchise rights to the Lanwei highway project in Henan and Shandong. However, it was unclear how he obtained those rights, which included building toll booths to charge drivers to use the highway.

The estimated investment needed for the project was 2.4 billion yuan in total.

The news organisation reported that Lu was said to have leveraged the toll rights for the project into huge loans with financial institutions, and that he did not have to pay any of his own money in advance. Then he took out 2.47 billion yuan in loans, and was still behind in payments owed, Yicai reported.

He allegedly used the money to invest in a number of financial institutions with different shell companies, which he leveraged as collateral to make investments, eventually triggering the financial crisis at Henan rural banks.

A saver who lives in Zhengzhou, surnamed Wang, told the Post that she believed she was being “monitored” by authorities and was stopped by strangers who prevented her from leaving her home on June 13.

It was they who broke the law, not us. We have the right to protest, because it’s our money
Wang, depositor in Zhengzhou, Henan province

She said they have not been around since, but she remains wary that they might return.

“It’s ridiculous that they have used so many resources in monitoring us, the depositors, when they should be investigating the fraudsters,” Wang said. “It was they who broke the law, not us. We have the right to protest, because it’s our money.”

Wang said that she and her parents have more than 200,000 yuan (US$30,000) deposited with the banks, and that she did not think the authorities’ response to the cash crisis at the rural banks in Henan was appropriate.

Xiao Yuanqi, vice-chairman of the China Banking and Insurance Regulatory Commission (CBIRC), said last month at a press conference that the CBIRC has attached great importance to the bad debt at small and rural banks during the past five years, and that the overall development of small banks has been stable and healthy, while the risks are manageable.