Chinese Banking Scandal Tests Faith in Communist Party Leadership

BEIJING — The savings opportunity with the rural bank in central China struck Sun Song, a 26-year-old businessman, as a great discovery. He would be linked to his existing account at a reputable large state bank. The rural bank was also offering high interest rates, so it seemed like an ideal place to park his savings of about $600,000.

The bank then abruptly froze his account this year and officials said they were investigating possible fraud. “I owe money on my credit card and I have to pay off my car loan,” he said. “I have two children. They are all waiting.

The financial scandal that ensnares Sun and thousands of others across the country could pose a serious test for the ruling Communist Party, which values ​​stability and its ability to rein in any threat. While the amount of money at risk is small relative to China’s economy, it strikes a blow at the party’s core promise to provide a better future for the people.

For members of the Chinese public, it has revealed just how vulnerable their money could be, even in a seemingly routine transaction like putting it in a savings account. Financial problems are even more sensitive as the economy weakens, with China last week reporting its slowest growth rate since the start of the coronavirus pandemic.

Many are similarly taken aback by the local government’s indifferent, if not outright hostile, response to the scandal. The crisis has hit five rural moneylenders that police say may have been controlled by a criminal gang that illegally transferred funds to other accounts, a scheme that began a decade ago.

Most officials have refused to guarantee that the money will be returned and have suggested that some of the depositors were involved in fraud. When Mr. Sun and hundreds of other depositors gathered this month for a protest in Henan province, where most of the rural banks in question were located, they were physically attacked by a mob of men while police officers were present. Since then, many protesters have reported being harassed by the police.

“The government takes our taxpayers’ money and then beats us up,” Sun said in a telephone interview before authorities warned depositors not to speak to the media. “My view of the world has been destroyed.”

Maintaining public confidence in the Communist Party is especially crucial this year, when China’s leader Xi Jinping is expected to further bolster his authority at a major political meeting in the fall. But it is already being tested by the economic slowdown, born in part of the government’s draconian campaign against the coronavirus and a regulatory crackdown on the once-booming property industry. This banking scandal has exposed more systemic problems in China’s financial system, including potential corruption and weak regulatory oversight in rural banks.

“If they can’t trust any of the banks anymore, and they don’t trust the housing market anymore, what would that affect people’s sense of security about their livelihoods?” said Zhiwu Chen, a finance professor at the University of Hong Kong. “The scope of this anxiety shared by people is increasing very fast. It is not good for social stability.”

The sensitivity of the issue was made clear in the unusually large protests.

Depositors began to complain in April when banks in Henan and Anhui provinces suddenly froze electronic withdrawals. Rural banks have helped fill the gap in financial services in China’s less developed areas, but they are also more susceptible to corruption, experts said. To compete with larger institutions, some also engage in excessively risky lending practices.

Authorities have not said how much money was frozen, but protesters say the figure is in the billions of yuan. The banks had attracted users from across China, like Sun, who lives in a southern city, through third-party online platforms and by offering unusually high interest rates.

As weeks passed without a resolution, some bank customers began gathering in the Henan provincial capital, Zhengzhou, for a series of protests demanding that regulators act more forcefully.

Officials immediately tried to silence them. The censors shut down the protesters’ message groups. Local authorities manipulated depositors’ mobile health codes, digital indicators China uses to track coronavirus infections, to bar them from entering public spaces. But after the manipulation drew widespread condemnation, local officials withdrew and protesters continued to gather, including on July 10.

Many of the protesters presented their demands as appeals, rather than challenges, to the authority of the Communist Party. Some waved Chinese flags. Others invoked Mr. Xi’s slogan of the “Chinese Dream” or carried a portrait of Mao Zedong. They were received ferociously anyway. Plainclothes men began beating and kicking the protesters.

The images of the violence, which were viewed tens of millions of times on Chinese social media, sparked widespread fury. Commentators said that the government had betrayed the faith of the protesters. Censors blocked trendy hashtags, but users created new ones.

As the outrage continued, regulators last week promised to refund depositors, but only those who had contributed less than 50,000 yuan, about $7,500, with details of the rest to be announced later. They also said they would not pay anyone who has used “additional channels” to obtain higher interest payments or those suspected of dealing with “illegal funds.”

Those stipulations were apparently a nod to the police announcement about the alleged criminal gang. According to the police, the gang’s scheme included the creation of illegal online platforms to solicit new clients.

Huang Lei, a lawyer from the eastern city of Hangzhou who has worked on fraud cases, said people who had unknowingly participated in an illegal scheme should still be entitled to a refund. But he recognized that, in reality, they might have few resources.

“The other side is eager to characterize it as illegal, they’ve described it four or five different ways, because they don’t want to take responsibility,” he said of authorities. Even if depositors demanded reimbursement and won, she added, the bank might not have adequate assets to make them whole, and it was not clear whether the state would make up the difference.

In fact, the scandal has raised broader questions about who is responsible for the missing money, aside from the alleged criminals.

Professor Chen, in Hong Kong, said governments at the county or village level often exercised undue influence over local bank managers, leading them to make risky or even fraudulent loans.

Historically, the resulting losses were manageable, because the central government was willing to bail out troubled banks and companies, he said. But recently, the government has signaled that those days are over, even as the deteriorating economy has put more pressure on those same institutions. As a result, Professor Chen said, “I hope to see more rural banks facing the same kind of problems as rural banks in Henan.”

Most likely, there are hidden debts scattered throughout China’s financial sphere. The country’s seemingly unstoppable growth over the past few decades had encouraged speculative lending and lending behavior by everyone from online lenders to major real estate companies.

The government has tried to downplay concerns about a broader problem. China’s central bank said last week that 99 percent of China’s bank assets were “within the safe limit.”

Still, it will now be up to the government to decide how to deal with losses both in Henan and those yet to be revealed, said Michael Pettis, a finance professor at Peking University. Officials could allow institutions to default, hurting lenders; they could squeeze the workers; they could print more money, which would lead to inflation. In the end, Professor Pettis said, “someone has to absorb the loss.”

For Henan depositors, the fear is that it is them.

Wang Xiaoping, a 39-year-old software industry employee from Hangzhou, said she had deposited about $95,000 in one of the rural banks. But all she had to show for it was an injured chin, from being attacked by a man dressed in black at the Zhengzhou protest. She tried to report the assault to police, but was told to go to another district, she said.

“I told the police, I am ready to die here,” she said in an interview on July 10. “This is my entire net worth, this is all my paychecks put together, and that’s how it’s gone.”

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