Customers of four rural banks in the central province of Henan, and one in neighboring Anhui province, to be paid by authorities as of Friday Comments by provincial financial regulators late Monday.
The first payments will be sent as a bank deposit to customers with a total of less than 50,000 yuan ($7,445), they said. Separate arrangements will be announced in due course for customers whose accounts exceed this, officials added.
Two other banks will make the payments, but regulators have not disclosed where the funds came from.
A 45-year-old entrepreneur from Wenzhou, in eastern Zhejiang province, told CNN Business last month that he couldn’t get a penny of his family’s $6 million in life savings.
Runs at smaller Chinese banks have become more frequent in recent years, and some have been accused of financial irregularities or corruption. But experts worry that a bigger financial crisis could be looming, fueled by the real estate collapse and mounting bad debts linked to the Covid-19 pandemic.
That’s a drop in the ocean of China’s vast banking system, but about a quarter of the industry’s total assets are held by about 4,000 smaller lenders, which often have opaque ownership and management structures and are more vulnerable to corruption and a sharp economic slowdown.
Henan police said on Sunday that they had arrested a number of suspects accused of illegally obtaining state funds from rural banks since 2011.
Despite the police action and some depositors being paid in the coming days, analysts warn that the crisis is far from over.
“The situation is still evolving,” ANZ chief China economist Betty Wang said in a note to clients on Tuesday.
“Despite the small size of the assets involved, the social impact of the incident could be significant if not properly managed. It could also lead to the next round of regulatory tightening,” he said. It added that Beijing may launch a new investigation into the online banking sector, rural banks or “potential local corruption”.
Not everyone will be helped
Monday’s announcement is the first promise by Chinese authorities that they will return the frozen funds.
However, many customers have more than 50,000 yuan in these banks, Wang said, leaving them in the dark about the future of their life savings.
There are other exceptions to the plan.
In China, local banks are only allowed to receive deposits from their own customer base, but in recent years it has become common for many smaller banks to partner with online platforms and raise funds domestically.
In early 2021, Beijing banned banks from selling deposit products through online platforms, fearing that the rapid expansion of the fintech sector could raise risks in the wider financial system.
But depositors CNN spoke to say banks told them the deposit products were legitimate and protected by deposit insurance.
“If the case is determined to be financial fraud, or if the affected accounts are not strictly saving deposits, then they may not be under the protection of the deposit insurance scheme,” Wang said.
In China, deposits of up to 500,000 yuan (almost $75,000) are guaranteed in the event of bank failure, but people could lose everything attached if a government investigation finds these cases to be “improper” transactions.
The social discontent caused by the incident could be a serious problem for the government.
The most affected are low-income farmers who have deposited almost all their savings, Wang said.
“They view banks as the safest place, backed by sovereign creditworthiness. Failure to do so could result in social unrest and threaten stability,” Wang said.
“This could be particularly sensitive after the local lockdowns and before the 20th Party Congress,” he said.
— CNN’s Beijing Bureau Jorge Engels and Nektar Gan in London contributed to this report.
