Curious what the real, and not pre-spun for public consumption, sentiment on the ground is in a China (where the housing bubble has already popped and the severe contraction in credit is forcing the ultra wealthy to luxury real estate in places like Hong Kong) from the perspective of the common man? The photo below, which shows hundreds of people rushing today to withdraw money from branches of two small Chinese banks after rumors spread about solvency at one of them, are sufficiently informative about just how jittery ordinary Chinese have become in recent days, and reflect the growing anxiety among investors as regulators signal greater tolerance for credit defaults.
Domestic media reported, and a local official confirmed, that ordinary depositors swarmed a branch of Jiangsu Sheyang Rural Commercial Bank in Yancheng in economically troubled Jiangsu province on Monday. The semi-official China News Service quoted the bank’s chairman, Zang Zhengzhi, as saying it would ensure payments to all the depositors. The report did not say how the rumour originated.
Chen Dequn, a resident in Yandong, just outside Yancheng, said she saw a crowd of about 70 to 80 people gathering in a branch of Sheyang Rural Commercial Bank in her town on Tuesday.
“At the moment there are about 70 or 80 people in there. Normally there’d only be about 10,” she told Reuters by telephone.
Officials at another small bank, Rural Commercial Bank of Huanghai, said they had faced similar rushes by depositors, triggered by rumours of insolvency at Sheyang. “We will be holding an emergency meeting tonight,” an official at the bank’s administration office told Reuters, but declined to comment further.
Why Yancheng investors suddenly lost confidence in the security of their bank deposits is not clear, given that the Sheyang bank is subject to formal reserve requirements, loan-to-deposit ratios and other rules to ensure it keeps sufficient cash on hand to meet demand.
Why the jitteriness? Because until now, bank failures in China have been unknown, as Chinese banks are considered to operate under an implicit guarantee from the government. That is changing. Which is why the rumor mill is on overdrive:
“It’s true that these rumours exist, but actually (the bank going bankrupt) is impossible. It’s a completely different situation from the problem with the cooperatives,” said Zhang Chaoyang, an official at the propaganda department of the Communist Party committee in Tinghu district, where the bank branch is located.
And Bear Stearns is fine…
Zhang was referring to an incident that rattled depositors in Yancheng in January, when some rural cooperatives — which are not subject to the supervision of the bank regulator — ran out of cash and locked their doors. Local officials say several co-op bosses fled after committing fraud.
China’s central bank governor said this month that deposit rates are likely to liberalised in one to two years – the most explicit timeframe to date for what would be the final step in freeing up banks to set their own interest rates.
It is widely expected to introduce a deposit insurance scheme before freeing up deposit rates, to protect savers in case a liberalised market puts major strains on smaller banks and alarms the public. Analysts also expect the controls on deposit rates to be lifted gradually. Is China’s debt nightmare a province called Jiangsu?
Why are bank runs like these only set to accelerate? Simple – unlike the US China has zero deposit insurance. Reuters expplains:
The case highlights the urgency of plans to put in place a deposit insurance system to protect investors against bank insolvency, as Chinese grow increasingly nervous about the impact of slowing economic growth on financial institutions.
Regulators have said they will roll out deposit insurance as soon as possible, without giving a firm deadline.
In the meantime, there are always helpful investor relations people willing to explain calmly just what is going on:
When contacted by Reuters by phone on Tuesday, an official at the Jiangsu Sheyang Rural Commercial Bank branch hung up, saying she was busy.
Others were even more helpful:
An official at the administrative office at Jiangsu Sheyang Rural Commercial Bank said the bank would publish a statement shortly. On its website, the bank says it is capitalised at 525 million yuan and had total deposits of 12 billion yuan as of end-February,
Officials at the Jiangsu branch offices of the China Banking Regulatory Commission (CBRC) declined to comment. The Yancheng branch of CBRC and the propaganda offices in Yancheng city and Sheyang county did not answer calls seeking comment.
Busy or not, for now, the banks may have survived following yet more capital infusions from the local government, but what happens when the default wave that has claimed solar, coal, and real estate developers finally impacts a deposit-holding institution? How will China – which has far more total deposits within its banking system than in the US (since the US banks fund themselves mostly using ultra-short term, overnight shadow funding) – survive a nationwide bank run we wonder?
What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors
3 5 2014
YANCHENG, China (Reuters) – Depositors wanting to withdraw money from a rural bank in eastern China’s prosperous Jiangsu province ahead of the Lunar New Year holiday found the doors locked, their money gone and employees offering a simple explanation.
“We’ve lent out all the money. There’s none left,” an employee told Reuters, repeating the explanation given to depositors weeks earlier.
In the run-up to the holiday in late January, word had spread that at least three rural cooperatives were running short on funds. In what the local government described as a “panic”, depositors rushed to withdraw cash. Local officials say several co-op bosses fled after committing fraud.
Though the incident is modest, it highlights the risk that financial liberalization intended to channel more credit to farmers and others who struggle to access loans from big state banks could open regulatory loopholes that enable a surge in risky lending.
“The core problem is, after using this (co-op) structure to raise funds, effective regulation is lacking,” said Chen Ping, director of the Farmers’ Credit Co-operative Union, an association of researchers studying rural co-ops.
“Actually a large amount of funding has been shifted into large-scale projects like real estate.”
Depositors would normally be protected by China’s banking regulator, which requires lenders to keep a certain amount of cash on reserve to meet depositor demand.
But as participants in a pilot program, the depositors quickly woke up to an unpleasant reality: so-called “Farmers’ Mutual Help Funding Cooperatives” aren’t technically banks. Not only did they not have sufficient reserves on hand, they weren’t legally required to.
Officials in Yancheng city told state media that the situation would be resolved before the holiday, but Reuters found on a recent trip that two of at least three co-ops that closed their doors before the holiday remain locked.
ABANDONED IN HASTE
On the city’s semi-rural outskirts, the offices of the Yancheng Environmental Protection Industrial Park co-op appear to have been abandoned in haste. The lobby, visible behind padlocked glass doors, was strewn with trash.
In an emailed statement, the propaganda department of Tinghu district in Yancheng told Reuters that 18.3 million yuan ($3 million) had been returned to depositors of three troubled co-ops before the Lunar New Year. That compares with 80 million yuan that state media previously reported had gone missing.
“The related departments of Tinghu district and the co-ops are working together to take effective measures and actively raising funds to ensure the timely payment of funds to depositors,” the department said in an unsigned statement.
Farmers’ co-ops began appearing in Jiangsu province around 2006, after the Communist Party issued guidelines encouraging the establishment of innovative rural financial institutions as part of a broader “New Socialist Countryside” campaign.
But, like many such policy statements, the document was vague, setting out broad goals for rural development while leaving specific agencies to fill in the details.
The government was content to allow co-ops to operate with minimal supervision because, at least in principal, they are membership institutions, not banks. Only members who have paid into the co-ops could get loans, and members assumed the risks from lending to one another.
Rather than the China Banking Regulatory Commission (CBRC), local agriculture affairs offices, with little experience of financial regulation, were tasked with supervising farmers’ co-ops.
“These institutions didn’t impinge upon the interests of the general public, so they could be lightly regulated,” said He Guangwen, professor at the College of Economics and Management at China Agricultural University.
The idea was to allow farmers who knew one another to co-operate on financing as well as work together on production. And because each loan would be small, the co-op’s overall portfolio would be diversified, preventing isolated defaults from bringing down the whole co-op.
By the middle of last year, 137 such co-ops had been established in Yancheng, with total membership reaching 170,000, deposits of 2.3 billion yuan, and total loans outstanding of 1.9 billion yuan, according to figures cited by official media.
But in practice, many co-ops shifted into riskier forms of lending. Jiangsu, along with neighboring Fujian province, is known for its vibrant grey-market lending networks, serving small factory owners and real estate developers who often cannot obtain bank loans.
Informal lending generally occurs through family and friends, but the rise of farmers’ co-ops created a platform for informal lenders to scale up their operations by collecting funds in a bank-like setting.
“The revelations of problems in Yancheng is mainly because the institutions aren’t standardized and regulation isn’t in place,” said He. “In China, lots of institutions exist calling themselves (farmers co-ops), but few are actually based on agricultural co-operation and sharing funds between members. Most have undergone mission creep.”
Despite the problems, the government is pushing further expansion of co-ops.
In January, China’s cabinet issued new guidelines on rural reform that called for expanding the co-op system based on “maintaining the membership system, the principle of closure, and restricting deposit-taking and loans to members”.
At the same time, the government is pushing other financial reforms designed to expand credit to under-served groups. The internet-based peer-to-peer (P2P) lending, micro-lending institutions, and privately-owned banks are among the initiatives the government is supporting.
Yet there are already signs that the problems afflicting co-ops in Yancheng may also affect other forms of non-bank lending. Local media have reported that dozens of P2P lending firms, which operate fee-based platforms to connect lenders with borrowers, have gone bankrupt in recent months.
“The truth is that a lot of burgeoning P2P platforms in China have no basic risk diversification, not to mention risk management,” Liang Xiaozhong, CBRC deputy director, wrote on the Financial Times website last week.
($1 = 6.1462 Chinese Yuan)