Chinese Bank Run

In the anatomy of an economic crisis, a bank run is the point of no return.

Bank runs occur when people scramble to withdraw cash from banks in fear of collapse. In the worst cases, banks’ liquid cash reserves are exhausted, not everyone gets their money and the bank defaults.

It’s a grim scenario which, fortunately, has occurred rarely in history.

The most significant bank runs in the United States took place during the 1930’s Great Depression. More recently, there were runs on numerous U.S. banks during the Financial Crisis in 2008.

In Asia, bank runs have also been rare. A run on Japanese banks in 1927 led to the collapse of dozens of institutions across the country. There was a banking crisis in Myanmar in 2003 which the country has never really fully recovered from.

But perhaps since the Great Depression, none has been as significant compared to what is seemingly unfolding in China right now.

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The Chinese bank run of 2022

In recent years it has become clear the Chinese people are losing faith in their financial institutions. There’s been anger over harsh COVID lockdowns in Shanghai recently, while the collapse of China Evergrande saw rare public demonstrations as residents faced the prospect of losing their life savings used as deposits for housing.

“Return our money” the Evergrande protestors chanted at Evergrande headquarters in Shenzhen in 2021.

The song book is eerily similar at bank branches in a number of China’s rural provinces right now.

Multiple sources contacted by Asia Markets, have confirmed deposits at the following six banks have been frozen since mid-April.

• Yuzhou Xinminsheng Village Bank (located in Xuchang City, Henan Province)
• Zhecheng Huanghuai Bank (City of Shangqui, Henan Province)
• Shangcai Huimin Rural Bank (Zhumadian City, Henan Province)
• New Oriental Village Bank (City of Kaifeng, Henan Province)
• Huaihe River Village Bank (Bengbu City, Anhui Province)
• Yixian County Village Bank (Huangshan City, Anhui Province)

It’s understood the banks with branches across the Henan and Anhui Provinces successively issued announcements in April, stating they would suspend online banking and mobile banking services due to a system upgrade.

At the same time, clients reported their electronic deposits in online accounts, mobile apps and third-party platforms could not be withdrawn.

This led to depositors rushing to local bank branches, only to be told they were unable to withdraw funds.

By late May, images emerged on Chinese social media of demonstrations at the front of numerous bank branches. Asia Markets has verified these images with local contacts.

According to one user on the Chinese social media platform WeChat, the protests are ongoing but are rarely mentioned in Chinese press.

“It has caused widespread concern on the internet but the media attention is not high, the highest degree of concern is the four banks in Henan.”

The People’s Bank of China (PBOC) has responded to the rural bank run. It issued a statement on April 25.

“The People’s Bank of China is highly concerned… At present relevant departments have launched an investigation, the People’s Bank of China will cooperate with the relevant departments, to protect the rights of financial consumers.”

Fraud scheme blamed

Following the public protests and the PBOC statement, the China Banking and Insurance Regulatory Commission revealed it is investigating fraudulent activity carried about by the Henan New Fortune Group – the largest shareholder of the four banks listed above in the Henan Province. It’s understood the commission is working with police to investigate allegations that the Group colluded with bank insiders to misappropriate bank funds.

Anti-CCP group, bannedbook.org, reported the following:

“According to a call recording between depositors and police officers, a company named Henan New Fortune Group Investment Holdings Co., Ltd. is suspected of illegally absorbing public deposits, and the amount is huge.”

Bank run contagion to “sweep across China”

Regardless of the cause, the developments raise serious questions about the health of China’s and its regulatory oversight. The more immediate concern, however, is the prospect of contagion, which could see the (so-far) rural-only bank run spread to bigger cities.

There’s evidence this is already happening.

In one of the only mainstream international media articles to report on the unfolding situation, local residents highlighted the seriousness of the situation and the likelihood of contagion.

From the Financial Times on June 9:

“Some depositors such as Xu have already lost trust in the system. The 39-year-old said he had withdrawn all of his deposits from 10 other small banks that had promised him an annualised yield of more than 4 per cent.

“Another depositor, a 30-year-old father, said he had placed more than Rmb900,000 in his village’s banks since 2020 at a return of 4.1 per cent. “I felt like being slaughtered,” he said, declining to give his name. He drove overnight to negotiate with the banking regulator in Zhengzhou, capital of Henan, in mid-May. “This is the money my wife and I have saved together since we got married. I had to lie to her that I was away for work.”

On Twitter, a video of a large line at an ICBC Bank in China (one of China’s largest state-owned banks) posted on Tuesday, June 9, suggest contagion is in progress.

Translated to English, the tweet reads “The bank card system is locked, and these people are here to unlock it. Massive runs are coming.”

Blogger, Jennifer Zeng, has reported major issues with withdrawing cash from banks in Shanghai in recent days. The uncertainty no doubt exacerbated by the prospect of more lockdowns as COVID cases again spike.

“All banks in Shanghai have restricted depositors from withdrawing money… A bank run is about to sweep China,” she said.

Should the world be worried about Chinese banks?

The lack of reporting about the clear signs of a bank run in China is somewhat surprising.

As HSBC China’s Xuefang Liu puts it, “The rise of China as a global economic power has caused concern that a crisis in Chinese banking could lead to a worldwide downturn similar to the Global Financial Crisis.”

While many analysts believed China’s banking system was widely immune to the Evergrande Crisis, cracks are beginning to emerge and should this bank run intensify, already volatile global markets could be faced with a black swan event even more significant than Evergrande.