Since mid-April, bank clients’ deposits in several rural banks in Henan, China, have “vanished.” More than 400,000 depositors could not withdraw their deposits of nearly 40 billion yuan or about $6 billion. 

So where did the $6 billion go? Was this case just unique, or did the Chinese rural bank system go wrong?

Let’s take a close look at several factors that involve the case to find the answer. 

Chinese savings rates are among the top in the world. 

China’s savings rate hit a peak of 52.3% in 2008. It has dropped to 46.2% in 2017 but is still more than double the world average of around 20%.

High savings primarily are from the household sector, accounting for 47% of national savings in 2017.

The reason for the high rate is the Chinese believe that money should be deposited in a bank for safekeeping.

Another reason is as Huang Dazhi, a researcher at the Star Map Financial Research Institute, said if people deposit money into the domestic banking system, it will be protected. Whether big or small, banks are insured.

The harsh competition between small and large banks creates a lot of risks.

The Chinese government has allowed the establishment of small banks to solve the shortage of capital in the countryside.

The China Banking and Insurance Regulatory Commission said that by the end of 2021, the country had 3,902 small and medium-sized banks in rural areas.   

 But it is difficult for village banks to attract savings from people because they have to face competition from large banks.

These banks have attracted people’s deposits with high-interest rates. Due to the small size of these banks, the management agencies have not strictly controlled them. The bank then expanded its credits by lending money to high-risk projects or the poor. This group’s ability to recover capital is shallow, making it difficult for banks to recover capital.

 Since 2018, Chinese regulators have handled 627 high-risk small and medium-sized rural banks. In addition, regulators also took 2.6 trillion yuan or about $387.8 billion of the bad debt. 

In June, China Business News published an article analyzing the problems of rural banks in China. Accordingly, the Central Bank data showed that some banks carry out illegal transactions, inefficient bank governance, and severe corruption. At the same time, these banks accumulate more and more risks because they make swift lending decisions. 

Many executives in the mainland financial system have been under investigations.

Mr. Du, who has worked in the financial industry in China for many years, told Radio Free Asia that rural banks stem from China’s rural credit cooperatives.

Although the government claims that this type of bank will provide good financial services to rural areas and help small and micro businesses grow. But in reality, many village banks have become cash machines for specific individuals and interest-driven groups.

In addition, in a statement published in August of last year, the Chinese government stated that roughly ten provincial rural credit unions’ heads and leadership team members have been under investigation.

That included Liaoning, Shaan West, Anhui, Sichuan, Inner Mongolia, Shanxi, Hainan, Shandong, and so on.

In Liaoning, the region hardest hit by finance-related investigations, 63 “senior leaders” of small and medium-sized banks have been subjected to punishment measures since 2021. It’s worth mentioning there are only 76 small and medium banks in Liaoning.

Dr. Wang Jiajia, a debt restructuring expert from Zhongying Black Forest investment group, said that with 63 top executives disciplining, means that nearly 83% of small and medium-sized banks in Liaoning have problems.

Previously, Wen Yaoqing, a member of the Party Committee and Vice President of Hubei Bank, was investigated in November, 2020.

Official reports by the regulatory authorities say that Wen Yaoqing forged evidence, transferred and concealed stolen funds, and accepted gifts. He also solicited or received other people’s property illegally with large sums of money. 

He has engaged in illegal profit-making activities by implementing projects and approving bank loans.

Several cases were extensive and involved a lot of people. Take the 2018 instance of Yang Alin, the former Inner Mongolia Rural Credit Cooperative Alliance chairman, and deputy party secretary. More than 400 Inner Mongolia Rural Commercial Bank system members, including more than ten executives, were reportedly engaged in the Yang Alin affair.

Rural banks’ poor management directly hurts depositors.

A couple in Xi’an deposited 900,000 yuan or about $134,000 in Guangfa Bank in 2019. However, after six months, the money could not be withdrawn.

When she contacted a teller, he told her to go to Beijing to withdraw money. But when she got there, she saw only a financial investment company. That means her money has been invested in the financial investment company instead of Guangfa bank. 

Then the teller resigned and disappeared. The manager at the bank assumed that the couple had agreed to invest in the teller’s scheme.

“No, not at all, we have suffered losses from investment in the past, and the safest way is to deposit money in the bank. We don’t want high-interest rates; we want the bank’s interest.” [Video 1:12-1:22 ]

She suspects that the Guangfa Bank of China employees invested in the company on her behalf because she did not know about it. And she and her husband have no financial investment needs.

“This is our pension; we want to deposit it in the safest and most reputable bank. China Guangfa Bank is also a big bank, so we deposited money there, but the money’s gone.” [Video 0:00-0:12 ]

Not only did the money of individual depositors disappear, but company funds also vanished.  

ST Amethyst, a tech firm, last month said that depositors’ funds of the company suddenly mysteriously disappeared from a bank. 

ST Amethyst’s announcement showed that the firm deposited 85 million yuan or $12.7 million as termed deposits into Lushi Bank from April 2021 to February 2022.

Accordingly, Lushi bank deducted about 76 million yuan or about $11.4 million from this term deposit on March 20, 2022. The bank continued to remove about 23 million yuan or about $3.4 million from the current deposit account opened by the company without cause on March 28, 2022.

The company announced on June 15 that it had just sued the Lushi bank.

Chinese regulators and banks try to dodge responsibility. 

On April 18, the rural banks in Henan abruptly shut down their online deposit and transfer channels due to what they said was a system maintenance upgrade.

According to Caixin, the four rural banks in Henan and two rural banks in Anhui with closed online systems had approximately 413,000 online depositors. This number includes foreign depositors. 

Regulators stated that significant shareholders of these village banks used third-party platforms or capital brokers to absorb public funds on May 20

New Fortune Group is reportedly a major shareholder of these banks. However, its boss had fled overseas with the money. 

Data released from the information query platform Tianyancha (天眼查 Tiānyǎn chá) shows the company was canceled on February 10.

Nevertheless, it’s been found that Henan New Fortune is not the largest shareholder. Instead, it’s Xuchang Rural Commercial Bank. Tianyancha indicates that Xuchang 许昌 holds from 20.5% to 51% of five Henan rural banks, making it the dominant shareholder. 

Besides, Xuchang Bank is controlled by Xuchang City Investment Corporation. Xuchang Finance Bureau directly manages the group.

The 2021 evaluation report of Xuchang Corporation clearly stated that the company is a state-owned firm directly under the Xuchang Municipal Government.

On May 25, Xuchang Corporation said that Xuchang bank is only the major shareholder of these regional banks, including Kaifeng New Oriental Rural Bank. It declined to have had any accurate control over the operation of these banks. 

It also stated that Xuchang Bank has no equity investment, capital, or business relationship with Henan New Fortune Group.

Yet, state media Xinhua News Agency reported that on May 18, the China Banking and Insurance Regulatory Commission said that Henan New Fortune Group, a shareholder of four rural banks in Henan, took over public funds through internal and external collusion, the use of third-party platforms, and fund brokers.

The statement from Xuchang City Investment Corporation was inconsistent with that of the Chinese government.

 Depositors have protested so many times for their money to be returned with no success. Once again, the Chinese regulator plays its role. 

After nearly four months, depositors still don’t know who will be responsible. Once again, depositors protested to defend their rights on June 29. However, a group of policemen was following them.

“What have we done? Did we do anything against the law that affects the personal safety of others? Where do we go, where do you follow! Shameless! We expressed our demands to solve this matter, but no leader showed up.” [Video 0:00-1:27]

“Everyone has parents and children. You have no sense of right and wrong at all; dogs have eaten your morals! We are just reporting problems, and you are following us every day! Do you have just a little morals ? Are you doing this worthy of your police uniform?” [ Video 1:27-1:33 ]

“You can’t pull up banners; you can’t shout slogans! 

How can we defend our rights?” [ Video 1:35-1:43]

Chinese netizens showed their opinion on this matter.

It is no exaggeration to say that many rural banks are considered untrustworthy.

I’ve bought gold; I don’t trust these banks at all. Money is safest in your hands.

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