A spate of bank runs has highlighted the growing challenges facing China’s financial sector, with local lenders particularly vulnerable due to the slowing economy and a crackdown on shadow banking.
This week, police in Yingkou, a city of 2.5m people in the north-eastern province of Liaoning, arrested nine residents for posting “inappropriate remarks” on social media that Yingkou Yanhai Bank, a local lender, was in a “deep financial crisis”.
The online comments prompted local residents to flock to the bank’s branches to withdraw their savings. “Everyone says YYB is running into trouble,” said a Yingkou resident. “There must be an element of truth in it.”
The incident follows a bank run last week in Yichuan, a city in the central province of Henan, in which depositors withdrew their savings after news that the lender’s president was under investigation.
While many large banks have taken measures to reduce non-performing loans, city commercial banks and rural financial institutions have suffered higher rates of soured loans as the economy has slowed. Beijing bailed out three troubled regional banks — Baoshang Bank, Bank of Jinzhou and Hengfeng Bank — earlier this year.
According to the China Banking and Insurance Regulatory Commission, regional banks, including city commercial banks and rural banks, accounted for 31.2 per cent of the banking sector’s total assets.
Zhuang Bo, an economist at TS Lombard, a research firm, said YYB exemplified the difficulties faced by China’s small lenders that had expanded their footprint by issuing shadow banking products, which could include off-balance-sheet lending, peer-to-peer transactions and credit extended by asset managers.
YYB was one of China’s fastest growing lenders after it launched in 2010. But the bank took a hit from the economic slowdown, reporting an 85 per cent surge in provisions in the first three quarters of 2019, compared with the year before — a sign that its asset quality was deteriorating.
“It is OK for small banks to be aggressive when the economy is strong,” said Mr Zhuang. “But problems will emerge when the economy starts to weaken.”
Mr Zhuang added that the way Yingkou government handled the bank run by arresting whistleblowers and telling depositors to calm down could create a “new form of moral hazard” because it did not address the bank’s operational problems.
“The crackdown on rumours is a partially effective strategy to manage the impact of bank runs but it doesn’t address the underlying problems of the banks,” said Andrew Gilholm, an analyst at Control Risks, a consultancy. “It is more important to have the banks build a better risk management system.”
The Yingkou government and YYB, part-owned by HNA Group, a conglomerate known for credit-fuelled expansion, denied that the bank was in trouble. Yingkou police said they would “severely crack down on rumour-mongering on the internet”.
A YYB representative said the lender was operating normally and had “plenty of cash” for withdrawals.
But Qian Zongxin, a professor at Renmin University in Beijing, said Chinese authorities needed to do more than simply deny allegations, which created a “huge risk” that they would not be believed, exacerbating the chance of more bank runs.
Public records showed YYB offered one of the highest deposit rates in the nation — 5 per cent interest for 360-day deposits compared with the benchmark deposit rate of 1.5 per cent — and had been under stress following several years of runaway expansion.
While the bank boasted a rich cash reserve, a local court listed one of YYB’s branches as a defaulter early this year for failing to pay depositors trying to withdraw money.
With additional reporting by Xinning Liu in Beijing