A rural banking crisis unfolds in China

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In central China, a crisis is brewing with growing concerns over property-related loans, angry depositors in the country’s biggest banking scam and a viral video showing tanks rolling through the streets.

Local authorities in central China’s Henan – the country’s third most populous province with around 100 million people – are cleaning up the real estate fiasco that led to a boycott of loan payments not only by owners of unfinished homes, but even by suppliers to property developers such as landscapers or sculptors.

Following an emergency meeting of key government agencies and major banks, a team comprising bad debt manager Henan Asset Management Company and state-owned Zhengzhou Real Estate Group will sort out funding issues for struggling developers . The team aims to revive stalled projects, sell assets and restructure businesses to ensure homes are completed and delivered to contract buyers.

The biggest banking scam in the country

Meanwhile, the central province is still facing pressure from the ongoing developments of the country’s biggest banking scam. In April this year, hundreds of Henan residents were reportedly unable to withdraw their savings from a handful of banks, leading to months of complaints and protests. A key event was the headline protest in July, when 1,000 depositors at a branch of the People’s Bank of China were met by a violent mob of unidentified men in white shirts, according to reports citing a widely circulated video.

Authorities publicly responded by first agreeing to reimburse individuals with deposits of up to 50,000 yuan ($7,400), at four banks in Henan and one in neighboring Anhui province, before recently expanding coverage for deposits of up to 100,000 yuan. Local police have also named a suspect Lu Yi as the leader of a criminal gang who allegedly transferred funds illegally via fictitious loans.

Manageable property issues

According to a DBS research report, China’s financial system is more than capable of withstanding mortgage boycotts. In fact, it can absorb an estimated loan loss of 7.5 trillion yuan before triggering systematic risk, compared to the 1.1 trillion yuan of total mortgage value involved in the crisis.

Nevertheless, there are risks for the banking system as a whole if such a scenario were to materialize, such as hesitation in lending to certain sectors and additional pressures from China’s economic slowdown.

Tanks deployed?

And while the mortgage boycott appears to be primarily a financial concern, the banking scam that has hit savers – about 40 billion yuan in deposits missing – has caused public unrest with concerns over the possibility of a new escalation.

In fact, some fear the situation has already escalated with another widely circulated video showing the deployment of tanks in the streets. Many outlets citing the video say the tanks are positioned to deter protesters and protect targeted banks. But some have cast doubt on those claims, identifying the location of the video not as Henan but east of it in a city in Shandong province.

Meanwhile, Beijing faces the difficult balancing act of reducing implicit government guarantees while trying to maintain sufficient confidence, especially in smaller banks, to avoid liquidity problems and achieve long-term financial stability. term. The country is home to nearly 4,000 small and medium lenders who control a total of nearly $14 trillion in assets.

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