Social Tensions Over Finance are Increased by a Massive Bank Scandal in China

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Last Updated on August 2, 2022 by Bitfinsider

The tight state banking rules and rogue consumer-finance companies in China are creating social and economic pressures. Recent grassroots protests against large, indebted developers that sold homes but haven’t finished them include the boycott of mortgage payments. However, before that, in May, violent clashes broke out in Zhengzhou, the capital of the Henan province, between demonstrators demanding their money back and police. The dysfunctional rural banking sector in China is being highlighted by that affair.

The primary shareholder of five rural lenders, Henan Xincaifu Group Investment Holding Co., allegedly conspired with bank employees to steal nearly 40 billion yuan ($5.9 billion) in deposits and investments, according to the investigating authorities. According to the investigators, they created false lending agreements to transfer the money and exploited online platforms to attract depositors. (Xincaifu has shut down, and the associated banks have requested that impacted customers register information with them online in order to receive money back.) The 3,800 banks that play a critical role in extending credit to China’s vast, growing countryside have had their reputations rocked by the announcement. Nearly 300 rural lenders have lately been classified as high-risk entities by the central bank.

Rural lenders hold a combined 49 trillion yuan in assets, or 14% of the total industry, according to government data, despite the fact that China’s finance market is dominated by five significant state-controlled banks, among them the largest bank in the world by assets, Industrial & Commercial Bank of China Ltd.

The majority of them, which include commercial banks, credit cooperatives, and village and township banks, were established following a drive for rural financing reform in the early 2000s. Although they operate in a challenging environment, they serve a critical role in supplying credit. Many of them must eke out profits by making small loans to people and companies in China’s impoverished and underdeveloped countryside. At the end of March, their total bad loan ratio was 3.37 percent, more than twice the national lenders’ average.

Higher interest rates entice depositors to banks. They have the lowest capital reserves against risky assets among China’s banks, according to regulatory data. And while the term “rural bank” connotes small-scale activities, some are substantial. For instance, the market value of Shanghai Commercial Rural Bank Co. is comparable to that of Commerzbank AG in Germany.

Village banks aren’t permitted to solicit deposits from locations outside of their immediate vicinity, yet the lenders in the most recent scam advertised their deposits online. It became a national issue as a result. Its extent was made clear when demonstrations got out of hand and Henan government authorities attempted to stop sufferers from entering the province using China’s Covid-19 health laws.

Authorities have battled for years to identify and address industrial issues. Since the government in Inner Mongolia took control of a lender in 2019, when some of its creditors were subjected to losses, the most recent unrest has been the largest blow to confidence. The weakest businesses in the sector would be merged the next year to create larger, more robust banks. However, they haven’t had much luck in lowering the number of lenders, which has been essentially steady since 2019.

The scandal breaks at a very delicate time. Later this year, China will have its 20th party congress, where President Xi Jinping is anticipated to win an unprecedented third term, placing a premium on stability. Many of individuals who lost their savings are now receiving compensation from the authorities. Regulators were asked to maintain financial market stability, address risks related to rural banks, and severly tighten down on financial crimes at a Politburo meeting presided over by Xi in late July.

The nation is also coping with the even more serious mortgage strike situation, which began in late June. As the campaign has spread to more than 300 projects in more than 90 cities, hundreds of thousands of homebuyers are refusing to make payments.

The economy is suffering as a result of China’s tough “Covid-zero” policy, making things even more challenging for smaller banks. “You already have strict limits of economic activity and influence on people’s lives with the rigorous lockdown and pandemic management measures,” claims Katja Drinhausen, director of the politics and society research program at the Mercator Institute for China Studies, a think tank in Berlin.


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Disclaimer: The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, legal, tax or other advice. Investing in or trading cryptocurrency or stocks comes with a risk of financial loss.

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