Chinese lenders suffer two bank runs in a week

Written by Ruby Hinchliffe
26th June 2020

Chinese local lenders, Baoding Bank and Yangquan Commercial Bank, suffered bank runs last week.

Governments and police intervened after rumours circulated around the firms, South China Morning Post reports.

Governments and police intervened after rumours circulated around the firms

During the coronavirus crisis, China has relied on these local lenders to provide funds to small factories and farmers. But the firms have struggled. Their non-performing loan ratios have risen and they have gone months with scarce access to capital.

Two bank runs in a week

On 20 June, local authorities in Baoding assured the public that they “should not believe in or spread rumours”. This was after a group of depositors rushed to withdraw money from the bank.

The city’s police have since arrested two individuals thought to have caused “panic among the public”.

Whilst Chinese citizens’ savings are guaranteed up to $70,000 (CNY 500,000), other financial products – such as wealth management and trust investment plans – are often sold via a banks’ branches and are not protected.

Three days earlier in Yangquan, the government and police issued similar statements after local depositors rushed to Yangquan Commercial Bank.

Non-performing loan ratios

Both lenders were already experiencing rising non-performing loan ratios pre-crisis. This was after the Chinese government started promoting debt-fuelled spending in the last decade.

Baoding Bank’s non-performing loan ratio increased to 2.12% at the end of 2019 from 2.09% in 2018.

Yangquan Bank – which has not yet published its 2019 financials – saw its non-performing loan ratio more than double to 2.57% in 2018 from 1.03% in 2017.

City commercial banks likes these had an average non-performing loan ration of 2.45% in the first quarter of 2020. This is according to the China Banking and Insurance Regulatory Commission.

That is 1.7 times the average of 1.41% which China’s big four state banks held over the same period.

Bank runs in April and November

Concerns over the stability of China’s $40 trillion banking system has been growing steadily in the last few months.

In April, Bank of Gansu experienced a bank run which saw regulatory intervention.

And over a two-week period last November, Yingkou Coastal Bank and Yichuan Rural Commercial Bank, also saw depositors race to withdraw cash.

Conclusions

“What we’ve seen is that in many occasions, in cities and counties, there are some consolidations in small lenders, especially the very weak ones,” Steven Chan, executive director of equity research at Haitong International, tells the South China Morning Post.

A report published by Moody’s last week supports this. It predicted “the slowing of loan growth for regional banks” through 2020, “as regulators act to resolve the most vulnerable regional banks”.

But Liu He, vice premier of China’s Financial Stability and Development Committee, believes the bank runs at particular lenders will not evolve into “systemic risks”.