Analysis | How China’s Henan bank scandal threatens a ‘crisis of confidence’ in nation’s financial system

Central bank vows to strengthen efforts to crack down on illegal financial activities during a period that could see ‘flare-ups of financial risks’

Small banks elsewhere in China, such as the rust-belt region of Liaoning, are also said to be susceptible to economic upheaval ‘if risks cannot be contained’

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Victims of what could be one of China’s largest financial scandals have staged protests in Henan province since their savings were frozen in April. Photo: Weibo

Published: 12:00am, 14 Jul 2022Updated: 9:55am, 14 Jul 2022

The banking scandal in China’s central Henan province could be merely the tip of the iceberg in terms of systemic risks, and its impact threatens to snowball if regulators fail to bring it under control while the nation is struggling to boost its economy, according to analysts.

Meanwhile, a central bank official vowed on Wednesday to beef up efforts in cracking down on illegal financial activities while also protecting consumer interests.

For months, rural savers have taken to the streets in Zhengzhou, Henan province, to demand their money after finding that their deposits had been frozen since April 18 at four banks – Yuzhou Xinminsheng Village Bank, Shangcai Huimin County Bank, Zhecheng Huanghuai Community Bank and New Oriental Country Bank of Kaifeng.

The protests subsequently escalated to a violent clash on Sunday. Protesters were surrounded by local police and were recorded being beaten by unidentified men in white shirts.

Local authorities said they would start repaying some of the victims up to 50,000 yuan (US$7,430) from Friday, but questions remain as to when or if depositors will get all of their savings back. In nearby Anhui province, regulators also announced a similar payment plan for savers with money in Guzhen Xinhuaihe Village Bank.

China’s small banks are often closely connected to local governments through companies they control, and these banks have exposure to the increasingly volatile real estate sector, making them more vulnerable to economic downturns than China’s largest banks.