BEIJING — The opportunity to save at the national bank in central China seemed like a great find to Sun Song, a 26-year-old businessman. It would be linked to his existing account with a large, reputable state bank. The rural bank also offered high interest rates, making it seem like an ideal place to park its roughly $600,000 in savings.
Then this year, the bank abruptly froze its account and officials said they were investigating possible fraud. “I owe money on my credit card and need to repay my car loan,” he said. “I have two sons. They are all waiting.”
The financial scandal that is entangling Mr Sun and thousands of others across the country could pose a serious test for the ruling Communist Party, which values stability and its ability to contain any threats it faces. Although the amount of money at stake is small relative to the Chinese economy, it is consistent with the party’s core promise to provide the people with a better future.
For members of the Chinese public, it has revealed how fragile their money can be, even in a transaction as seemingly routine as putting it into a savings account. Financial issues are all the more sensitive as the economy weakens, with China reporting its lowest growth rate since the start of the coronavirus pandemic last week.
Many are equally unnerved by the local government’s indifferent, if not downright hostile, response to the scandal. The crisis has engulfed five nationwide lenders that police say may be controlled by a criminal gang that illegally transferred money to other accounts, a scheme that began a decade ago.
Officials have mostly refused to guarantee the money will be returned and have suggested that some depositors were involved in fraud. When Mr Sun and hundreds of other savers gathered this month for a protest in Henan province, where the affected rural banks were mainly located, they were physically assaulted by a mob of men in front of police officers. Many protesters have since reported being harassed by police.
“The government takes our tax money and then beats us,” Mr Sun said in a telephone interview before authorities warned savers not to speak to the media. “My worldview has been destroyed.”
Maintaining public confidence in the Communist Party is especially critical this year, when Chinese leader Xi Jinping is expected to tighten his authority even further at a major political rally in the fall. But it’s already being put to the test by the economic slowdown, which has been fueled in part by the government’s draconian campaign against the coronavirus and a regulatory crackdown on the once thriving real estate sector. This banking scandal has exposed more systemic problems in China’s financial system, including possible corruption and weak regulatory oversight at rural banks.
“If they can’t trust any of the banks anymore, and they already don’t trust the housing market, what would that do to people’s sense of security about their livelihoods?” said Zhiwu Chen, a professor of finance at the University of Hong Kong. “The magnitude of this fear that people share is increasing very rapidly. That is not good for social stability.”
The sensitivity of the issue became apparent in the unusually large protests.
Depositors started complaining in April when banks in Henan and Anhui provinces suddenly froze electronic withdrawals. Rural banks have helped fill the financial services gap in China’s less developed areas, but they are also more prone to corruption, experts say. To compete with larger institutions, some also engage in excessively risky lending practices.
Authorities have not said how much money has been frozen, but protesters claim it is billions of yuan. The banks had attracted users from all over China – such as Mr. Sun, who lives in a southern city – through third-party online platforms and by offering unusually high interest rates.
As weeks passed with no resolution, some bank customers began to gather in Henan’s provincial capital, Zhengzhou, for a series of protests demanding regulators take stronger action.
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Immediately officials tried to silence them. Censors shut down protesters’ message groups. Local authorities manipulated depositors’ mobile health codes — digital indicators China uses to track coronavirus infections — to prevent them from entering public areas. But after the manipulation received widespread condemnation, local officials withdrew and protesters continued to gather, including on July 10.
Many of the protesters presented their demands as an appeal rather than a challenge to the Communist Party’s authority. Some waved Chinese flags. Others invoked Xi’s slogan of the “Chinese Dream” or carried a portrait of Mao Zedong. They were greeted with cruelty anyway. Plainclothes men began beating and kicking the protesters.
Images of the violence, which were viewed tens of millions of times on Chinese social media, sparked widespread anger. Commentators said the government had betrayed the protesters’ faith. Censors blocked trending hashtags, but users created new ones.
As the outcry continued, last week regulators pledged to refund depositors — but only those who deposited less than 50,000 yuan, about $7,500, with details for the rest to be announced later. They also said they would not refund anyone who had used “additional channels” to obtain higher interest payments or who were suspected of dealing with “illegal funds”.
Those provisions were seemingly a nod to the police announcement about the suspected criminal gang. According to the police, the gang’s plan involved setting up illegal online platforms to recruit new customers.
Huang Lei, a lawyer in the eastern city of Hangzhou who has worked on fraud cases, said people who unknowingly participated in an illegal scheme should still be entitled to a refund. But he acknowledged that in reality they might have little recourse.
“The other side would like to characterize it as illegal — they’ve described it in four or five different ways — because they don’t want to take responsibility,” he said of the authorities. Even if the depositors sued for repayment and won, he added, the bank might not have enough assets to fully make them, and it was unclear whether the state would make up for the difference.
Indeed, the scandal has raised wider questions about who is responsible for the lost money, beyond the suspected criminals.
Professor Chen, in Hong Kong, said provincial or village-level governments often exerted undue influence on local bank managers, leading them to grant risky or even fraudulent loans.
Historically, the resulting losses have been manageable as the central government has been willing to bail out troubled banks and companies, he said. But recently, the government has indicated that those days are over, even as the deteriorating economy has put more pressure on those same institutions. As a result, Professor Chen said, “I expect more rural banks will face the same problems as Henan’s rural banks.”
There are most likely hidden debts scattered throughout China’s financial world. The country’s seemingly unstoppable growth in recent decades had encouraged speculative lending and borrowing behavior by everyone from online lenders to major real estate companies.
The government has tried to downplay concerns about a broader problem. China’s central bank said last week that 99 percent of China’s banking assets were “within safe limits.”
Still, it is now up to the government to decide how to deal with the losses in Henan and those yet to be disclosed, said Michael Pettis, a professor of finance at Peking University. Officials could allow institutions to default, hurting lenders; they could squeeze workers; they could print more money, leading to inflation. In the end, Professor Pettis said, “someone has to take the loss.”
For the Henan depositors, the fear is that it will be them.
Wang Xiaoping, a 39-year-old software industry employee from Hangzhou, said she put about $95,000 into one of the rural banks. But all she had to show was an injured chin from the attack by a man in black during the protest in Zhengzhou. She tried to report the assault to the police, but they told her to go to another district, she said.
“I have told the police that I am ready to die here,” she said in an interview on July 10. “This is all my net worth, this is all my salary together, and it just disappeared.”