What is the banking fraud troubling China?

On July 10, 2022, China witnessed a rare event – large-scale protests. Hundreds or perhaps thousands of people showed up outside Zhengzhou People's Bank in Zhengzhou, Henan province’s capital, to protest against banking fraud.

A number of small banks in Henan have frozen the deposits of hundreds of thousands of people and gone AWOL. Anxious people, worried about their life’s savings, came down heavily on a provincial branch of the Chinese central bank demanding their money be returned.

THE COMPLETE STORY

•    A few months ago, a number of small banks, mostly in Henan province, froze the deposits of several of their customers and stopped the withdrawal of money. The banks cited maintenance work at the time for the frozen funds. Websites also showed that it is under maintenance.

•    But after two months, when the problem was not resolved, people started getting worried. Since then, the banks have gone AWOL with billions of yuan of depositors’ money.

This is huge. Don't know how this will end. Henan bank is NOT the only one that is having problems with liquidity. All four Chinese banks are having the same issue. Some depositors found they can save and can NOT withdraw money with their bank cards. #bankrun #China #CCP pic.twitter.com/5WYYgpmIWP

— Jennifer Zeng 曾錚 (@jenniferatntd) July 10, 2022

•    Protests similar to the recent one were attempted earlier and one protest was held in May, but authorities had dispersed the crowds. Reports even revealed that authorities used Covid trackers to prevent victims of the banking scam from going out of their homes and protesting. Some protestors who reached the protest site in June told International media that their health status turned red, automatically forcing them into quarantine.  

•    During the Sunday protests too, a group of unknown men in white shirts, reported to be security personnel, clashed with protestors. Victims confided in the media that they were being silenced and intimidated by the government even when they have broken no law.

STORY IN NUMBERS

1. Massive protest out break in Henan province，China.
More than 3000 protesters who are victim of bank financial fraud show up in capital City of Henan.
None of them can withdraw money from account now.

info credit @Qwaszx179730654pic.twitter.com/HXuJmZZYSj

— 巴丢草 Badiucao (@badiucao) July 10, 2022

These numbers put in context how massive the issue is:

•    At least 39 billion yuan ($5.8 billion or Rs 46,162 crore) is believed to have been frozen.

•    Some 4,00,000 banking customers across China have lost access to their life savings.

•    The customers belong to 6 rural banks.

•    Authorities have promised to start paying small amounts to victims to calm the anger. So far, the relief has been extended to some clients of 4 banks.

•    The suspected company behind the fraud owns over 100 shadow companies and controls at least 13 rural banks.

•    The banks involved reportedly offered interest rates as high as 9% while the country’s legal interest rate ranges from 3-4%.

HOW DID THE FRAUD UNFOLD

•    According to Bloomberg, an official investigation has so far found the scam involving one Henan Xincaifu (New Fortune) Group Investment Holding Co, a private investment firm with shares in five lenders, defrauded the people. 

•    The lenders colluded with bank employees to lure in people, marketed financial products through online platforms and then routed the money into real estate and construction business by fabricating lending agreements.

•    However, when the loan to real estate turned bad, the banks couldn’t return the money required to pay back the depositors with attractive high-interest rates. Chinese authorities also named a suspect in the matter said to be a criminal gang leader Lu Yi.

•    “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 effectively control several rural banks, by ways of cross-shareholding, increasing capital and shares, and manipulating bank executives, among other means,” SCMP quoted the Xuchang police.

THE LARGER CONTEXT

Deepening Cash Crisis in China:
Since April, four rural banks in China's central Henan province have frozen millions of dollars worth of deposits, threatening the livelihoods of hundreds of thousands of customers in an economy already battered by draconian Covid lockdowns. pic.twitter.com/JxJjjbUMm8

— 🔥Yajna (@yajnaa_) July 11, 2022

The bank fraud highlights China’s larger problem of small lenders and rampant corruption in them. China has around 4,000 small lenders who own a quarter of the banking sector’s total assets. Beijing is also said to be struggling with finding a solution for the rising number of bad loans with small lenders.

While authorities have promised to pay back some part of the victims’ money, it is still unlikely to cover the complete deposit amount for most. Moreover, the banks also acquired deposits from people residing outside of Henan, which is not allowed. Victims from across China may not be eligible for government relief.