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On July 10, hundreds of people gathered on the steps outside the People’s Bank of China building in Zhengzhou, Henan Province in the latest protest over banks that won't honor their customers' deposits. But what exactly were those customers putting their money into? Liqian Ren explains some important details.

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Just under a week ago, Zhengzhou, a major Chinese city, saw the latest protests over a billion-dollar bank fraud in Henan that used the internet and promises of easy return to…well you know the rest (you can read about the Henan scheme here ). 

But what exactly happened in Henan with these banks? There were details missing from media reports, both Chinese and English, that I couldn’t quite understand. And I had a cross-Pacific flight to catch. 

So I turned to Liqian Ren, economist who trained at Peking and Chicago universities, tweeter of good explainers , and director of Modern Alpha at WisdomTree Asset Management. By the time I landed, she had answered and filled in some details that were not clarified in the most media reports.  

Below is a lightly edited transcript of our email conversation:

Customers of four small banks in Henan have been locked in a months-long dispute with these banks after they suddenly suspended online cash withdrawals in April.

In April, the China Banking and Insurance Regulatory Commission accused the Henan New Fortune Group, a shareholder in the four banks, of illegally using third-party platforms and fund brokers to attract depositors from across the country. 

The customers still have not been able to access their funds, which has led to various protests and other actions. 

Why has it been so difficult for the China Banking and Insurance Regulatory Commission to force the banks to give their customers’ money back? Because the money is gone? 

Yes, a significant portion of the 40 billion yuan (about $6 billion) involved in this case is gone. The main fraudster Lǚ Yì 吕奕 was found to have acquired foreign citizenship and may be living in the U.S. 

It’s also been reported that the 50,000 yuan ($7,400) return of capital promised after the protest came from liquidated assets of the fraudulent operation.

  A CNN report cited one customer from Wenzhou who had “put his life savings of about $6 million into accounts at three” of the Henan banks and hasn’t been able to access them since April.

Why would a person from the prosperous city of Wenzhou put so much money into unknown Henan banks? The promise of outsize returns? 

The promise of higher interest which is usually 1-1.5% higher than rates available in bigger banks, and the appearance of safety as they were advertised as “bank deposits.”

None of the reports mention so-called “Wealth Management Products,” but is that what these customers had invested in? 

No, these products were sold as bank deposits, even though the money was diverted and didn’t go into the pool as insured bank deposits. Therefore this case is so tricky.

Most Chinese now understand “Wealth Management Products” don’t have the money back guarantee as in older days. Now these recent events are making people question whether bank deposits indeed are as safe as promised.

Last year there were reports that “China’s shadow banking sector continues[d] to dim” as regulators cracked down on risky behavior and sought to contain systemic dangers to the financial sector.  

Are these problems at these Henan banks a sign that the shadow banking sector is still very much alive? 

Shadow banking sector indeed has been deemed not directly related to this case.

The Henan banks’ problems have more to do with weak banking regulation of smaller banks. The slowing economy, particularly the real estate sector, has contributed to the increase of bad loans. 

But technology made electronic deposits easy cross provincial lines, which added to the complexity. And fintech platforms that act as middlemen for banks and depositors amplified the case as well. Traditionally without fintech platforms, a county bank wouldn’t be able to attract deposits in such a large quantity of money from so many depositors.

What else should we know to understand the Henan problems in the context of China’s banking sector?

In this case, the local government, the depositors, and the central government’s deposit insurance fund, who’s going to pay, and for how much when there is fraud or bad loans, whether it’s Evergrande, Henan banks, or the current big news of homeowners bundling together to stop mortgage payments for undelivered houses.

Each one is going to suffer some loss, but also wants the other stakeholders to shoulder more loss. Unfortunately, depositors, or homeowners in many cases ended up shouldering a greater share of loss than governments due to weak legal protections.

The banking sector is still mainly state owned, with some political factions attached to the financial sector more dominating than others. Political jostling could influence how much power banks have in negotiations.

Jeremy Goldkorn worked in China for 20 years as an editor and entrepreneur. He is editor-in-chief of SupChina, and co-founder of the Sinica Podcast. Read more

Former U.S. Ambassador to China

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