5 September 2022, NIICE Commentary 8238
Ankit Kumar
On 10 July 2022, hundreds of people gathered outside China’s central bank’s Zhengzhou branch in Henan, demanding access to their savings accounts, which had been frozen for months due to a USD 6 billion banking fraud. Immediately, several images began to circulate in the media, showing hundreds of protestors protesting and raising slogans. However, the peaceful protest turned violent when white shirt bodyguards started beating the protestors. Protestors were holding a demonstration against freezing their accounts by the local bank in the Henan and Anhui provinces. These small banks had promised higher returns, but this scheme turned out to be a scam. As details emerged, the whole scam was done by the group named Henan Xincaifu Group. It misled customers regarding high-interest rates and used the online method to attract customers to deposit their money. Local police have alleged that the conspirator behind the fiasco is li Yu, allegedly living in foreign.
Following the protest, the government was made to announce that it would begin paying customers who had deposited less than 50,000 Yuan in the bank account after the document verification of the customers. This scandal has also brought to light the deeper structural problem in the Chinese banking sector. Some Chinese citizens have begun to doubt the safety and stability of the Chinese banking sector. Furthermore, it has significant implications for President Xi, who is set to be elected for a third term.
Background of the Henan Protest
On 18 April 2022, several rural banks announced that customers would no longer be able to withdraw their savings. People accounts at Yuzhou Xinminsheng Village Bank, Shangcai Huimin County Bank, Zhecheng Huanghuai Community Bank, and New Oriental Country Bank of Kaifeng in Henan province, and Guzhen Xinhuaihe Village Bank in Anhui province, were among those affected. These banks ceased operations, including withdrawing and transferring funds from savings accounts.
The vast majority of deposits at these small banks were made through online financial products offered by third-party platforms. They promoted their deposit products through online platforms and sold them to people nationwide. These platforms, many of which made inflated returns claims. In the hope of getting high interest, many customers deposited their money in these banks. However, money was not deposited into customer accounts. Instead, it was diverted. Whereas depositors assumed they were depositing money in a bank. These products were marketed as bank deposits, even though the money was redirected for other purposes.
According to multiple reports, this bank fraud has cost an estimated 40 billion Yuan (USD 6 billion). Initially, when Customers sought to complain to government and bank officials on numerous occasions but they did not respond effectively. In April, several protesters tried to hold an offline and online demonstration to get their money returned. But the government did little to handle the situation and restore the customers’ confidence.
At last, The People’s Bank of China (PBOC) did announce in April that relevant departments had launched investigations into the four banks. The Chinese Central bank has also declared that it would work with the various agencies to protect consumers’ legitimate rights and interests. But following the authorities’ refusal to handle the situation ‘effectively’, hundreds of customers protested outside the China Banking Regulatory Commission (CBRC) in Zhengzhou, Henan.
Protesters carried placards with slogans such as “return my savings” and “against the corruption and violence of the Henan government,” along with “against the abuse of power, against the beating of depositors by Henan government-aligned gangs.” Others chanted, “Li Keqiang [China’s premier], investigate Henan!” The police initially tried to break up the protestors. However, protesters were adamant about continuing their protest against bank fraud.
Authorities in the area swiftly intervened to scatter the crowd. Immediately, a group of “unidentified men” in white t-shirts started to assault the demonstration, pushing and assaulting protestors to scatter them. At the same time, the police did nothing but watch as the chaos broke out. Many people were hurt, and some were beaten so severely that their eyes and mouths were bleeding. Only after the demonstration, the government was compelled to issue a statement. According to local police, “Several people suspected of using local rural banks in Henan Province, Central China, to commit a series of serious crimes have been detained.”
According to the preliminary investigation, a group of individuals, including the company’s actual controller, Lu, were suspected of using regional rural banks to commit crimes as early as 2011. It was also found that Henan Xincaifu Group ‘illegally’ attracted saver deposits and “internal and foreign collaboration” to seize total control of the five local banks, according to the CBRC. Later, the Henan Province banking and insurance industry regulator and the provincial financial affairs supervision bureau subsequently announced that repayments would start on July 15th, starting with customers with deposits of up to 50,000 Yuan or less for single organisations and individuals. Furthermore, on July 21st, authorities announced that the second series of repayment of deposits up to 100,000 Yuan (USD14,787) would start from July 25.
Controversy Surrounding the Protest
China is the first country to use the health code — a colour-coded QR code system — to track and trace COVID-19 cases during the pandemic. According to the health code system, anyone with a red code cannot enter any public building, including offices, hotels, and apartment complexes. This system was used to track depositors’ movements in the Henan Banking Scandal. Many depositors were not able to withdraw cash or come to Henan for protest because their COVID-19 health codes had mysteriously turned red, preventing them from leaving their homes. This prompted an investigation by the higher authorities into Henan Xincaifu Group and local authorities. According to a news report, five people were sentenced in Henan province, including four officials, for abusing their authority to turn people’s health codes red for quasi reasons.
This has raised worries that China might suppress dissent using its extensive COVID-19 monitoring infrastructure. In addition to being unable to travel across the nation without a green code, residents who do not have a green code on their smartphones are also denied entry to public transportation and places like restaurants and shopping centers. Explaining these tactics of employing ‘contractors’ to control dissent by authorities in China, Professor Lynette H. Ong says Chinese officials have a history of employing masked “contractors” to carry out coercive measures to reduce public opposition and potential backlash. It is a strategy aimed at lowering the costs of protests and accountability, which are typically connected to government repression.
Implications for the Chinese Banking Sector
In China, to portray the crisis as an unintended separate incident, the Chinese government blamed it on dishonest local bureaucrats and illegal businessmen. However, the Chinese government cannot deny that several debt crises are affecting the Chinese economy simultaneously. One of them involved a scenario where a cash-strapped developer could not provide homes to home buyers, leading to borrowers refusing to make mortgage payments. These crises show how the Chinese banking system is under pressure from the economic downturn. Problems with the Henan banks may be related to poor regulatory oversight of smaller banks. The rise in defaulted loans is a result of the economy’s slowdown, especially in the real estate industry.
According to Sun Tianqi, Director of the Financial Stability Bureau of the People’s Bank of China, “China’s financial risks are generally convergent and manageable, and 99 percent of its banking assets are within the safety margin.” And there are 316 high-risk institutions in the 8-D level, which makes up 7 percent of the banking participants, but the asset size only makes up 1 percent of those institutions. The vast majority of small and medium-sized banks’ central bank ratings are within safe limits”.
Authorities have stated that the central bank has proactively collaborated with local governments and regulators to address the issue and has directed local branches to maintain regional financial stability, monitor liquidity risks, and provide contingency support. However, the banking crisis spill over is not going away anytime soon; China is in the midst of a debt crisis, which necessitates the Chinese government to work actively to address the crisis.
Impact of Banking Scandal on CCP
Recent banking scandals and mortgage crises in China have tested the Chinese Communist Party, which values stability and the capacity to defeat challenges. Even though the sum at stake in Henan Banking Scandal is negligible when measured against the size of the Chinese economy, it undercuts the party’s central promise to provide for the betterment of people’s lives. Maintaining public trust in the Communist Party is crucial this year because it is expected that China’s leader, Xi Jinping, will tighten his control even further before the significant political event later this year, where he is widely expected to be elected for a second term. However, the Chinese people’s confidence in the economy is already being tested by the government’s harsh anti-Coronavirus measures, economic slowdown, and regulatory restrictions on the once-thriving real estate sector.
It has shown how vulnerable their money can be for Chinese people, even in simple banking operations like putting it in a savings account. As the economy weakens, financial issues become more delicate, with China recording its weakest growth rate since the start of the Coronavirus pandemic. Moreover, structural problems in China’s financial system, including potential corruption and poor regulatory government oversight at rural banks, have been made public due to this banking scandal. It could pose a test for CCP to address these crises immediately. Otherwise, people may lose confidence in the system.
Ankit Kumar is pursuing Masters in Chinese Studies from Jawaharlal Nehru University, India.
