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Disappearance of deposits triggers distrust in Chinese banks
Scandal at a regional bank undermines confidence in entire system


Customers of a rural Chinese bank have found that their deposits disappeared into thin air. (Source photos by Reuters/AP)
NORIYUKI DOI, Nikkei staff writerJuly 27, 2022 13:45 JST

SHANGHAI -- Customers of a rural Chinese bank have found that their deposits disappeared into thin air. Lies told by the lender, supposed to be under strict supervision of financial authorities, are inviting distrust and shaking public confidence in the country's banking system.

The bank's call center kept giving false explanations to a typical customer.

April 17: "Customers need to make a reservation by phone if they want to withdraw more than 100,000 yuan ($14,800) from their online account."

April 18: "Our system is under renovation. Customers cannot withdraw their deposits until the work is complete."

April 19: "There is no deposit record with the name, mobile phone number and ID number you've given."

The lender in question is Yu Zhou Xin Min Sheng Village Bank, a small bank based in Xuchang, Henan Province, that serves rural populations. A man in Shanghai who had deposited 2 million yuan at the bank realized the grave nature of the problem on April 19, when a call center worker told him that his deposit didn't exist. Hardly believing what he had been told, he contacted the center two more times, only to get the same answer.

He first learned of the bank, virtually unknown outside its home, when a friend told him it offered high interest rates. He opened an account via its official app, called Mini-programs, on the social media platform WeChat and put the 2 million yuan into the account -- or so he believed. "I thought I could withdraw the money immediately if the bank seemed to be in trouble," he said.


People protest over the rural bank scandal outside a People's Bank of China building in Zhengzhou, Henan Province, on July 10. © Reuters

Where has his money gone? An investigation by public security authorities in Xuchang found that the bank collected money illegally through "fake deposits."

According to the authorities, a criminal group led by a mastermind named Lu Yi brought Yu Zhou Xin Min Sheng Village Bank and several other regional banks under their control through Henan Xincaifu Group Investment Holding from 2011. Lu also founded Junzheng Zhida Tech, whose main business is to develop banking systems, and had the company develop online systems for the lenders to enable them to accept deposits via the internet.

The banks solicited "deposits" to their online services, but investigators believe they didn't actually put customers' money into their accounts. That was the reason the Shanghai man was told that his deposit didn't exist. The authorities in Xuchang say the banks transferred the money to Henan Xincaifu Group Investment Holding, disguising it as loans. Lu established another tech firm, Chenyu Information Technology, which tampered with the banks' data to conceal the illegal activities from authorities.

The group had controlling stakes in five banks, all small and regional. But the misconduct affects 1 million people who have become unable to access deposits totaling 10 billion yuan, Chinese media Caixin reports.

The unprecedented scandal is threatening to undermine China's banking system as a whole.

"Debt has created a huge hole in the Bank of Nanjing's finances. I recommend customers withdraw their deposits," wrote Fu Mingfei, an analyst at the major Chinese brokerage Western Securities, on WeChat on June 30. His post went viral. The bank rejected Fu's argument as "malicious rumors," and his employer fired him. In the evening of July 3, public security authorities in Nanjing announced that they had penalized a 39-year-old man for "spreading false information on WeChat that posed negative impact on the Bank of Nanjing."


After an analyst recommended that customers withdraw their deposits at the Bank of Nanjing, the bank called his viral post "malicious rumors." (Photo by Noriyuki Doi)

According to the China Banking and Insurance Regulatory Commission, the ratio of nonperforming loans stood at 1.35% among large commercial banks at the end of March. The highest ratio is seen among rural commercial banks, at 3.37%. The government boasts of the financial health of lenders, but the assessment of bank assets is largely left to financial authorities' discretion. That is at the root of the unspecified public distrust in banks.

One typical example is Baoshang Bank in Inner Mongolia, dissolved by the central government in 2020. The bank was effectively controlled by Tomorrow Holding, led by tycoon Xiao Jianhua, who went missing in Hong Kong in January 2017. Its ratio of nonperforming loans was 1.41% in 2015 and 1.68% in 2016. But as it concentrated its loans on Tomorrow Holding, the ratio surged to 98% by the time it was dissolved.

More than 1,000 people held a protest on July 10 in Zhengzhou in Henan over the village bank scandal. The central government announced the following day that it would reimburse affected customers, and the rescue plan is expected to help calm the situation. But the fact that a criminal group controlled banks and authorities failed to detect the wrongdoing is shaking public confidence in the banking sector.

Count your Ouighurs, are they still here ?

Interesting video

Yep, it is quite the debacle over there. Did you see the video of tanks rolling into the town with all the protests where all this initially started? It immediately turned into everyone talking about a Tiananmen 2 about to start.