China to repay customers hit by ‘biggest’ bank scam

Bloomberg

Chinese authorities will start repaying most of the victims in the nation’s biggest bank scam after hundreds of angry customers took to the streets again over the weekend to ratchet up pressure on the government.
Clients from the four rural banks in the central province of Henan and one in Anhui will be repaid “in advance” starting Friday, according to statements by local branches of the China Banking and
Insurance Regulatory Commission. Individuals with deposits of up to 50,000 yuan ($7,400) will be repaid first, with arrangements for the rest subject to further notice.
Hundreds of bank customers protested after similar demonstrations broke out in May and again in late June in Zhengzhou, a city of some 10 million people, calling on the authorities to return tens of billions of yuan of deposits in a suspected scam. That has prompted the banking watchdog to speed up drafting a plan to resolve risks even as a police investigation is still ongoing.
“The latest move shows the local government is trying to maintain social stability by advancing a small amount of payments out of their pockets,” said Liao Zhiming, the chief bank analyst at China Merchant Securities Co. He expected future large-sum payments to some customers won’t be made in full because the funds aren’t considered as deposits and won’t be protected by the nation’s deposit insurance scheme.
An official probe into the case had found that Henan Xincaifu Group Investment Holding Co, a private investment firm with stakes in the five lenders, colluded with bank employees to take deposits and marketed financial products via online platforms and then transferred the money by fabricating lending agreements. Accounts were frozen as part of the investigation, and depositors have been protesting since May because they have been unable to
access their savings.
Videos circulating online showed protesters on Sunday at a branch of the People’s Bank of China in Zhengzhou, the provincial capital of Henan, charged by a column of people who appeared to be plainclothes officers.
The demonstrators hurled water bottles, tussles broke out, and at least one person was kicked and tackled. Another clip showed protesters holding up signs and shouting: “Return my money.”
The large demonstration was unusual for China, but the situation doesn’t appear to be getting beyond the control of authorities for now. Police later said they took more suspects into custody and have seized and frozen funds and assets involved in the case.
Still, it’s not clear whether the latest proposal will quell the outcry. Some customers with deposits exceeding 50,000 yuan are still concerned they may not get full payments.
The banking regulator said it won’t make repayments for accounts that are suspected to have involved illegal activities or received high interest from other channels, according to the notices. Most customers received an annual interest rate of about 4% from their deposits or investments in this case, which is in line with returns on wealth management products offered by other Chinese banks.
The Chinese government has started to pare back the implicit government backstop for banks to reduce risky behavior and maintain long-term stability of the financial system. But officials are facing a difficult balancing act: If the public loses confidence in banks’ ability to survive on their own or state’s support in the event of liquidity stress, it could precipitate exactly the type of crisis authorities are trying to prevent.
Smaller banks, faced with rising nonperforming loans after years of explosive growth and poor internal controls, are seen as particularly vulnerable. China has nearly 4,000 small and medium-sized lenders that collectively control almost $14 trillion in assets. But confidence in these banks has waned since 2019, when the government seized a lender for the first time since 1998 and imposed losses on some creditors.
Authorities have over the past few years disposed of 2.6 trillion yuan worth of bad debt at smaller banks, the CBIRC said in May. Beijing is also raising several hundred billion yuan for a stability fund to bail out troubled financial firms.
While the case is unlikely to have any spillover effect into the broader Chinese banking sector because rural banks make up less than 1% of the industry’s total assets, “inappropriate handling of the issue could result in social unease and threaten stability,” Betty Wang, a senior economist at Australia & New Zealand Banking Group Ltd., wrote in a note on Tuesday.
“This can be particularly sensitive in the aftermath of local lockdowns and ahead of the 20th Party Congress,” she wrote.