Share on facebook
Share on twitter
Share on telegram
Share on whatsapp
Share on linkedin
Share on print
Share on email

China’s Banking Trouble Points to Financial Contagion, Declining Economy

Bank trouble in China could in turn worsen social and economic instability in China to the detriment of Xi Jinping and the CCP.

◎ Bank trouble in China could in turn worsen social and economic instability in China to the detriment of Xi Jinping and the CCP.

Thousands of depositors across China have been gathering outside rural banks in Henan Province and demanding their money on a regular basis since their funds at four local rural banks were frozen in mid-April. About 400,000 depositors are estimated to be affected, according to mainland media. 

On July 10, a large demonstration outside the Zhengzhou City branch of the People’s Bank of China (PBoC) was forcibly broken up by the local police and plainclothes security agents clad in white T-shirts. Videos of the heavy-handed police action were shared on Chinese social media and garnered tens of millions of views. 

Henan was not the only place seeing bank trouble. On June 30, the market value of Bank of Nanjing’s stocks evaporated by over 7.4 billion yuan after the bank suddenly announced a day before that its director and president Lin Jingran had been “reappointed” to another position—vice chairman of a Nanjing state-owned company with total assets about 10 percent of what the Bank of Nanjing has—“due to work necessities.” The Bank of Nanjing’s release of a positive-looking semi-annual performance report on July 3 did not stop its shares from sliding another 1.07 percent to 10.18 yuan per share—down 15 percent from a peak in April—when the markets closed on July 4. 

The recent bank trouble in China is a sign of systemic risks being triggered as the Chinese economy deteriorates rapidly and financial contagion from the real estate debt crisis spreads further. The bank trouble could in turn worsen social and economic instability in China to the detriment of General Secretary Xi Jinping and the Chinese Communist Party (CCP). 

Blame game
The CCP authorities sought to blame the spreading of “malicious rumors” for the sharp sell-off of Bank of Nanjing stocks. On the evening of June 30, an industry analyst noted in a WeChat group chat that the bank is facing a debt crisis because it had been helping the local government with debt problems. The analyst added that the bank’s public sector loans went mainly to real estate developers and government projects, and that the bank may have to declare bankruptcy if its debt crisis is triggered.

Those “malicious rumors” about the Bank of Nanjing, however, are unlikely to have been the trigger for the June 30 sell-off because they were made only after the markets had closed. The markets also remained pessimistic even after the bank released a positive semi-annual performance report. 

Meanwhile, the CCP authorities blamed fraudsters for the trouble with the four rural banks in Henan. In April, the China Banking and Insurance Regulatory Commission (CBIRC) accused Henan New Fortune Group, a shareholder in the four banks, of using third-party internet platforms and fund brokers to illegally attract depositors from all over the country. 

On July 11, the public security authorities of Xuchang City in Henan announced that they are investigating a “criminal gang” headed by Lü Yi and have made some arrests. Lü’s “criminal gang” is alleged to have used Henan New Fortune Group to control the troubled rural banks, created fictitious loans to illegally transfer funds, and established online platforms to promote financial products and seek out new customers. 

Risks triggered
Lü Yi and his “criminal gang” may indeed be the main reason for rural bank troubles in Henan. However, problems with banks in Henan and Nanjing are likely only surfacing now because the economic situation in China has worsened to a point where risky or fraudulent schemes can no longer be sustained.

Rural banks like those in Henan previously took advantage of the CCP’s promotion of the “internet economy” starting in 2015 and used third-party platforms to sell high-yield deposit products to depositors from all over the country. This scheme saw the funds of rural banks swell beyond what banks of their size are capable of managing, sharply raising their risk profile. Those risks, however, stayed hidden during the real estate sector boom when developers readily took out bank loans and were able to pay interest.

In 2021, the PBoC noted in its financial stability report that 89 banks had taken in 550 billion yuan in deposits through third-party platforms. Close to half of the 550 billion yuan were held in banks rated as “high-risk” by the central bank. This troubling development was likely a key reason behind the CCP authorities’ move to ban commercial banks from selling deposit products on third-party platforms in January 2021. 

When times were good, the rural banks and the “criminal gangs” behind their operations were able to secure sufficient funds to sustain their scheme. But as the Chinese economy swiftly deteriorated as a result of a real estate sector debt crisis, the COVID-19 pandemic, Beijing’s draconian “zero-COVID” policy, and global economic decline, those banks struggled to recover loans from developers and pay interest to its depositors. That, plus possible schemes by the “criminal gangs” to siphon off funds, would have quickly exposed the four rural Henan banks’ financial risks, forcing them to freeze deposit accounts mid-April. 

China’s worsening economic conditions also appear to be a key factor in the Bank of Nanjing’s debt crisis. The industry analyst’s June 30 WeChat postings and information from mainland media indicate that debt problems at the Nanjing local government and property developers like China Evergrande have led to a surge in non-performing loans at the Bank of Nanjing, triggering the bank’s implicit risks. 

Tip of the iceberg
The Bank of Nanjing case and trouble with the four Henan banks are likely just the tip of the iceberg of serious systemic and financial risks with small- and medium-sized banks in China. Other banks could soon report similar problems as the financial contagion from the property sector debt crisis spreads and the Chinese economy moves towards recession.

The CCP authorities are wary that public anger from the banking crisis could get out of hand and have moved quickly to address the issue, with local authorities in Henan having thus far resorted to both carrots and sticks. On the one hand, the authorities mobilized security forces to disperse those outside the Zhengzhou PBoC on July 10. On the other hand, the authorities moved the next day to denounce the “criminal gang” behind the bank fraud the next day and announce advance payments to persons or institutions with 50,000 yuan or less in deposits from July 15.

The Xi leadership has pressing reasons to resolve the banking trouble promptly. Letting the issue drag out would undermine public confidence in small- and medium-sized banks across the country, triggering more bank runs and a full-blown financial crisis. Xi’s factional rivals in the CCP elite would also look to exploit the crisis to undermine the Xi leadership before the 20th Party Congress and attempt to block Xi Jinping’s bid to extend his tenure as Party leader. Escalating factional struggle and financial crisis would in turn erode the CCP’s political legitimacy and seriously threaten regime security. 


Search past entries by date
“The breadth of SinoInsider’s insights—from economics through the military to governance, all underpinned by unparalleled reporting on the people in charge—is stunning. In my over fifty years of in-depth reading on the PRC, unclassified and classified, SinoInsider is in a class all by itself.”
James Newman, Former U.S. Navy cryptologist
“Unique insights are available frequently from the reports of Sinoinsider.”
Michael Pillsbury, Senior Fellow for China Strategy, The Heritage Foundation
“Thank you for your information and analysis. Very useful.”
Prof. Ravni Thakur, University of Delhi, India
“SinoInsider’s research has helped me with investing in or getting out of Chinese companies.”
Charles Nelson, Managing Director, Murdock Capital Partners
“I value SinoInsider because of its always brilliant articles touching on, to name just a few, CCP history, current trends, and factional politics. Its concise and incisive analysis — absent the cliches that dominate China policy discussions in DC and U.S. corporate boardrooms — also represents a major contribution to the history of our era by clearly defining the threat the CCP poses to American peace and prosperity and global stability. I am grateful to SinoInsider — long may it thrive!”
Lee Smith, Author and journalist
“Your publication insights tremendously help us complete our regular analysis on in-depth issues of major importance. ”
Ms. Nicoleta Buracinschi, Embassy of Romania to the People’s Republic of China
"I’m a very happy, satisfied subscriber to your service and all the deep information it provides to increase our understanding. SinoInsider is profoundly helping to alter the public landscape when it comes to the PRC."
James Newman, Former U.S. Navy cryptologist
“Prof. Ming’s information about the Sino-U.S. trade war is invaluable for us in Taiwan’s technology industry. Our company basically acted on Prof. Ming’s predictions and enlarged our scale and enriched our product lines. That allowed us to deal capably with larger orders from China in 2019. ”
Mr. Chiu, Realtek R&D Center
“I am following China’s growing involvement in the Middle East, seeking to gain a better understanding of China itself and the impact of domestic constraints on its foreign policy. I have found SinoInsider quite helpful in expanding my knowledge and enriching my understanding of the issues at stake.”
Ehud Yaari, Lafer International Fellow, The Washington Institute
“SinoInsider’s research on the CCP examines every detail in great depth and is a very valuable reference. Foreign researchers will find SinoInsider’s research helpful in understanding what is really going on with the CCP and China. ”
Baterdene, Researcher, The National Institute for Security Studies (Mongolian)
“The forecasts of Prof. Chu-cheng Ming and the SinoInsider team are an invaluable resource in guiding our news reporting direction and anticipating the next moves of the Chinese and Hong Kong governments.”
Chan Miu-ling, Radio Television Hong Kong China Team Deputy Leader
“SinoInsider always publishes interesting and provocative work on Chinese elite politics. It is very worthwhile to follow the work of SinoInsider to get their take on factional struggles in particular.”
Lee Jones, Reader in International Politics, Queen Mary University of London
“[SinoInsider has] been very useful in my class on American foreign policy because it contradicts the widely accepted argument that the U.S. should work cooperatively with China. And the whole point of the course is to expose students to conflicting approaches to contemporary major problems.”
Roy Licklider, Adjunct Professor of Political Science, Columbia University
“As a China-based journalist, SinoInsider is to me a very reliable source of information to understand deeply how the CCP works and learn more about the factional struggle and challenges that Xi Jinping may face. ”
Sebastien Ricci, AFP correspondent for China & Mongolia
“SinoInsider offers an interesting perspective on the Sino-U.S. trade war and North Korea. Their predictions are often accurate, which is definitely very helpful.”
Sebastien Ricci, AFP correspondent for China & Mongolia
“I have found SinoInsider to provide much greater depth and breadth of coverage with regard to developments in China. The subtlety of the descriptions of China's policy/political processes is absent from traditional media channels.”
John Lipsky, Peter G. Peterson Distinguished Scholar, Kissinger Center for Global Affairs
“My teaching at Cambridge and policy analysis for the UK audience have been informed by insights from your analyzes. ”
Dr Kun-Chin Lin, University Lecturer in Politics,
Deputy Director of the Centre for Geopolitics, Cambridge University
" SinoInsider's in-depth and nuanced analysis of Party dynamics is an excellent template to train future Sinologists with a clear understanding that what happens in the Party matters."
Stephen Nagy, Senior Associate Professor, International Christian University
“ I find Sinoinsider particularly helpful in instructing students about the complexities of Chinese politics and what elite competition means for the future of the US-China relationship.”
Howard Sanborn, Professor, Virginia Military Institute
“SinoInsider has been one of my most useful (and enjoyable) resources”
James Newman, Former U.S. Navy cryptologist
“Professor Ming and his team’s analyses of current affairs are very far-sighted and directionally accurate. In the present media environment where it is harder to distinguish between real and fake information, SinoInsider’s professional perspectives are much needed to make sense of a perilous and unpredictable world. ”
Liu Cheng-chuan, Professor Emeritus, National Chiayi University