Why Some Chinese Banks Can't Repay Their Depositors

They Borrowed At High Rates To Fund Property Developers, But As China’s Realty Sector Turned Sour, The Smaller Banks Found Themselves In A Crisis

- Kenneth Mohanty

Several local banks in China have had to freeze withdrawals to prevent a bank run. They had systemic issues that the Covid-19 pandemic and a real estate slump made worse. Some experts liken the situation to the bursting of the US housing bubble that triggered the 2008 financial crisis.

Code Red To Crush Protests

Starting April this year, depositors in several local banks of central China’s Henan and Anhui provinces lost access to their savings. As protests erupted, local authorities made fierce attempts to quell them. In Henan, they even set protesters’ Covid status on a mandatory phone app to red, to confine them indoors. Videos also surfaced of “government-backed” goons attacking protesters.

Beijing says a gang of criminals triggered the bank run by misappropriating funds through fraudulent loans. The banks were already creaking under a Covid-induced economic slump and loan defaults by builders. While it investigates the “gang”, the government has allowed small withdrawals and promised guidance on bigger deposits.

Reports say the freeze affects about 400,000 bank customers and involves deposits of about $6 billion – a drop in the ocean for China’s banking system, but experts warn of systemic issues in the Chinese economy.