Confidence in China’s $43 trillion banking system is eroding among the nation’s more than 1 billion account holders according to a report from Bloomberg, prompting a spate of bank runs in the world’s most populous country.
The bank runs were sparked in part by social media-fueled rumors, a report from Bloomberg said. The rumors have popped up at an alarming frequency, forcing regulators and even police to step in and calm depositors.
In the past month alone, worried savers have descended on three different banks in the country to withdraw funds amid rumors of cash shortages, although those shortages were later dismissed as false.
Customers rushed to one particular bank in the Hebei province to take out money, as local regulators assured the public of the soundness of its lenders and police moved to stop the bank run.
The country is struggling due to the coronavirus outbreak, several bank bailouts and the first bank seizure in more than two decades last year, the Times reported, leading to a shaky situation in the world’s largest banking system.
Social media rumors are capable of spreading like wildfire in the country, leading to serious risks for banks.
“The perception Chinese savers had of banks being risk free is changing even though in nearly all recent cases their deposits have been protected,” said Zhang Shuaishuai, an analyst at the Shanghai-based China International Capital Corp. “Once a rumor like this spreads, it brings immediate liquidity risk to a bank.”
Large Transactions Limited Due to Bank Run Fears
Also in Hebei, authorities kicked off a pilot program to limit large transactions within the province, hoping to put a stop to the bank runs.
Deposit-taking has provided a stable and low-cost funding base in China’s financial market for decades, playing a key part in the rise of its economy, the second largest in the world behind the United States.
Chinese households hold about $13 trillion (90 trillion yuan) worth of bank deposits, more than anywhere else in the world. Regulators have been working on new protections to preserve these funds for banks.
The aforementioned two-year pilot program is planning to expand to Zheijang and Shenzhen in October to encompass 70 million people, which would require all clients to pre-report any large withdrawals or deposits of 100,000 yuan ($14,000) to 300,000 yuan.
On Saturday, the China Banking and Insurance Regulatory Commission again warned that lenders are facing a surge in bad debt as the economy continues to sputter, ravaged by the coronavirus and hitting its slowest pace in four decades.
Additional measures have included rolling over debt and delaying loan payments. These measures have had the effect of limiting the immediate surge in bad debt, but the regulator added that the problems of poorly managed banks and the deteriorating ability of companies and people to repay loans are still far from solved.
Chinese Banks Forced to Repay Profit to Save Society At-Large
Banks are now being asked to forgo 1.5 trillion in profit this year to offer lower lending rates, cutting fees, deferring loan repayments, and granting more unsecured loans to small businesses to help the economy.
The government has also said it would like to see more small banks merge in order to shore up their strength, but thus far it has not come to fruition, for the most part.
“China has too many banks,” said Zhang. “Quite a few of them are weak in corporate governance and earnings capacity. A better option is to take a more proactive approach to restructuring those regional banks.”