No deposit insurance, no confidence: Rumor sparks panic and three-day bank run in Chinese city

Source: QZ

Hundreds of Chinese citizens are swarming rural bank branches in eastern China demanding to withdraw their deposits, after rumors that the county’s largest bank was on the verge of collapse. Such panics in China, where banks operate under an implicit guarantee from the government, are extremely rare.

People gather in front of a branch of Jiangsu Sheyang Rural Commercial Bank, in Yancheng, Jiangsu province. Reuters/Carlos Barria

An employee of Jiangsu Sheyang Rural Commercial Bank talks to a customer at one of the banks branches in Jiangsu province. Reuters/Carlos Barria

Responding to rumors that Jiangsu Sheyang Rural Commercial Bank, Sheyang county’s largest bank (link in Chinese) with 44 branches, is in financial trouble, depositors have been flocking to branches in at least three villages since March 24. Another bank in the farming county, the Rural Commercial Bank of Huanghai, was also bombarded with wary savers wanting to take their money out, according to state media.

Residents waited in droves in the rain outside bank branches to take their money out. Armored vehicles have been carting in fresh loads of currency. The bank has remained open for longer to serve customers withdrawing money over the past three days.

It’s unclear how the rumor began—officials have started an investigation and pledged to punish those responsible—but it’s not surprising residents are so jumpy. Aside from a tacit guarantee from the PBOC, China lacks a deposit insurance scheme. In January, a group of credit cooperatives and loan guarantee companies in the same province failed after funds were mismanaged, wiping out some 80 million yuan. Local residents said that many of those waiting in line at the banks are elderly residents who had lost money in these ventures.

“It’s all pretty much elderly people who are taking part in the bank run,” Miao Dongmei, manager of a baby supply store across the Yancheng branch of the bank told Reuters. “Like our grandparents generation, they don’t have much money after a lifetime’s worth of hard work and they don’t want to be tricked again.”

These cooperatives, mainly for farmers who have been accustomed to informal lending among friends and family, became popular in Jiangsu province about eight years ago. Only members who pay into the groups can get loans, and they assume the risks of lending to other members. The cooperatives, managed by local agricultural officials instead of the country’s banking regulators, have been subject to less supervision than traditional lenders like Jiangsu Sheyang bank.

The incident isn’t likely to have a spillover effect on China’s stressed financial system. The 12 billion yuan (about $1.9 billion) in deposits at Sheyang Rural Commercial bank constitute only about 0.01% of China’s total bank assets. Stock markets in China and the region barely took notice of the news. Staff at the bank said on March 26 that depositors have been able to withdraw their money and the bank is still operating as usual (link in Chinese).

However, it is a sign of how shaky confidence is among regular Chinese depositors. Investors have already grown anxious after China witnessed its first corporate bond default earlier this month and a real estate firm is currently teetering on the brink.

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