China’s banking crisis draws fresh scrutiny as economic slowdown highlights emerging risks

China’s banking regulator is pressing ahead with ‘risk disposal’ at small- and medium-sized banks to protect public savings

A rural banking scandal, which has drawn rare protests, has highlighted latent financial risk facing China’s slowing economy

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A scandal at four rural banks in Henan province and one in neighbouring Anhui has cast the spotlight on latent financial risk in China. Photo: Weibo

Published: 8:15pm, 21 Jul 2022

China’s banking regulator vowed on Thursday to crack down on criminal activity among small lenders, in a fresh pledge to address a rural bank crisis that has drawn rare protests and triggered concerns about financial stability ahead of the 20th party congress.

China’s small- and medium-sized banks account for nearly a third of total banking assets in the world’s No. 2 economy, but have over time built up substantial risks, according to the China Banking and Insurance Regulatory Commission (CBIRC).

In an effort to deal with the problem, the commission is carrying out a regulatory clamp down on equity and connected transactions, with a focus on shareholders and executives who have swindled money from small banks, CBIRC spokesman Qi Xiang said.

Regulators are also encouraging small banks to take on capital, including from overseas, to improve their capital volume and quality.

Qi said the overall operation of China’s small- and medium-sized banks was stable, but the regulator would press ahead with “risk disposal” to protect public savings.

Deposits at four rural banks in Henan province and one in neighbouring Anhui have been frozen since mid-April, leading to protests from disgruntled customers. The value of frozen funds is estimated at 40 billion yuan (US$5.9 billion), with some depositors fearful they have lost their life savings.

Authorities have accused a private financial group of misleading members of the public with promises of high-return wealth management products.

Local regulators in both provinces began repaying customers with deposits of up to 50,000 yuan at the end of last week, with Henan saying it was largely finished on Thursday.

Earlier in the day, the two provinces announced they would start repaying individuals with deposits up to 100,000 yuan from next Monday.