Published on December 8, 2019.
This chapter introduces a Nikkei article on a series of bank runs at regional and rural commercial banks in China.
Through the cases of Yichuan Rural Commercial Bank in Henan Province, Yingkou Coastal Bank in Liaoning Province, the de facto nationalization of Baoshang Bank, management concerns over regional financial institutions, the deposit insurance system, stress tests, and prolonged stagnation in local economies, it examines the growing instability of China’s financial system.

December 8, 2019.
Runs on deposits are occurring at regional financial institutions in China.
The following is from the Nikkei newspaper the day before yesterday.
China: “Bank runs” in local regions.
Rumors spread around small banks.
Economic slowdown causes excessive reactions among the elderly and others.
Runs on deposits are occurring at regional financial institutions in China.
At the end of October, large amounts of deposits were withdrawn from Henan Yichuan Rural Commercial Bank, and in early November from Yingkou Coastal Bank in Liaoning Province.
With the de facto nationalization of Baoshang Bank as the trigger, elderly people and others are overreacting to rumors and false information about management instability spreading mainly on the Internet.
Because the economy is slowing, anxiety over regional finance has become easier to spread.
Yingkou City, Liaoning Province, is a port town overlooking the Bohai Sea.
On November 6, Mr. Shi, a company employee, saw a line at a branch of Yingkou Coastal Bank on his way home from work.
When he returned home, his wife told him, “There are rumors online about management instability at Coastal Bank.”
The trigger for the rumors was that a Chinese newspaper had reported the previous day that “a company that is a major shareholder of Coastal Bank is in financial difficulty.”
There were too many people that day, and he could not withdraw his deposit, so on the 8th, Mr. Shi canceled a fixed deposit worth 300,000 yuan, about 5 million yen.
“It was a five-year maturity, and three years had already passed.
The interest is a pity, but my wife’s mother insisted, ‘No matter what,’ so I had no choice,” he said.
A shopkeeper across from another branch watched the entire course of the bank run.
Depositors began lining up on the morning of the 6th, and the line grew longer and longer.
The shopkeeper also lined up, but his queue number was in the 1,000s.
The bank operated on a 24-hour basis that day, and according to this shopkeeper, “the final payment was at 3 a.m. the next day, the 7th.”
As depositors rushed in, the bank apparently ran short of cash, which further increased the anxiety of depositors.
The shopkeeper said, “In the end, they had cash piled up about one meter high along the wall behind the bank counter.”
Most of those who lined up were elderly people.
Under China’s deposit insurance system, deposits of up to 500,000 yuan per person per bank are fully protected, but many depositors did not have such basic knowledge.
The deputy mayor held a press conference, 120 police officers were dispatched, and people who had spread rumors were detained, among other measures, and the bank run finally subsided.
On October 29, a bank run also occurred at Yichuan Rural Commercial Bank in Henan Province.
Rumors of management instability spread after the chairman was detained by the authorities on the previous day, the 28th.
This means that two bank runs occurred in just ten days.
There were also bank runs centered on rural areas in 2015 and 2016, when downward pressure on the economy was strong, but this time they have spread to urban areas such as Yingkou.
The two banks have asset sizes comparable, in Japan, to lower-ranked regional banks or upper-ranked credit banks.
In both cases, their capital adequacy ratios, which indicate financial soundness, exceed regulatory levels, and there is no basis for the rumors of management instability.
However, there are also circumstances under which it cannot be said that the management of either bank is rock-solid.
Coastal Bank has a rival in the same city, Yingkou Bank, and Coastal Bank is inferior in asset size and branch network.
Its largest shareholder is HNA Group, which is undergoing management reconstruction, and loans to HNA have also expanded rapidly, causing total assets to increase by about 40 percent in one year.
At the nationalized Baoshang Bank, its major shareholder, Tomorrow Group, had diverted funds.
Coastal Bank, with its expanding loans to a major shareholder, has aspects reminiscent of Baoshang Bank.
At the end of July, Yichuan Rural Commercial Bank’s financial rating was downgraded from “AA minus” to “A plus.”
The main reason was that the ratio of nonperforming loans to total loans jumped from 0.54 percent at the end of the previous year to 2.95 percent at the end of 2018.
It is certain that the management environment for regional finance as a whole is becoming severe.
Not only Baoshang Bank, but also Bank of Jinzhou in Liaoning Province, Hengfeng Bank in Shandong Province, Jilin Bank in Jilin Province, and others have received successive management support from government-affiliated funds and major banks.
In every case, prolonged stagnation of the regional economy lies beneath the surface, and it is highly likely that more regional financial institutions will fall into management difficulties in the future.
In the China Financial Stability Report compiled in November by the People’s Bank of China, the central bank, stress tests were conducted on 1,171 banks nationwide, ranging from large to small and medium-sized institutions.
It estimated that if banks faced heavy burdens such as “gross domestic product growth of 4.15 percent and a 4.23 percent fall of the yuan against the dollar,” 159 banks, or 13 percent of the total, would fall into capital shortages.
Even if they sold high-quality assets such as government bonds that they held, they would not be able to eliminate the funding shortages.
Liquidity has emerged as the Achilles’ heel of bank management.
Because bank runs lead directly to funding shortages, financial authorities are expected to continue their vigilance.
From Yingkou, by Itsusaku Harada.