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Banking scandal sparks historic protests in China

September 27, 2022
topic:Good Governance
tags:#China, #protests, #economic justice, #COVID-19
by:Amy Liu
Rare protests broke out in China over a $50 billion banking scandal and officials’ abuse of COVID prevention policies.

In a rare scene in China, hundreds of protesters took to the streets on a hot July day waving banners reading "against corruption and violence of the Henan government."

What drove them to defy Beijing was a massive frustration with the People’s Bank of China - China’s central bank - and the system that enabled a large-scale fraud in rural financial institutions.

Demonstrators were soon assaulted by a group of unidentified people clad in white who seemed to be collaborating with the local police to crack down on the protests. Some protesters were immediately taken away, while others discovered that following this and a series of other rallies their health codes turned red – which barred them from entering a wide array of venues, including commercial buildings, shopping malls and restaurants; it even restricted them from taking public transportation. 

Under China’s COVID-response system, one’s health code only turns red after they test positive; but these protesters’ codes were changed to red with a negative COVID test result. This had fed the ongoing suspicion among citizens that the authorities are using COVID-related policies to crush dissent and limit their freedom of movement.

One man told local media that his code had turned red without any reasons three times. 

After news of the abuse of COVID technology became widespread, the authorities announced  they punished five local officials for illegally giving red codes to people without authorisation, which violated regulations and led to serious social consequences. 

What's behind these rare protests in China?

Many of the protesters fell victim to one of China’s largest bank fraud incidents in recent years.

They paid deposits into certain financial products in the country’s rural banks – often privately owned by institutions that can set one up with a smaller amount of capital than a commercial bank. Many elderly people and farmers had poured their life savings into such products, which promised a high interest rate of 4.3 percent. 

But soon after, customers of the Yuzhou Xinminsheng Rural Bank told local media in April that they were locked out of the bank’s online system, after it said it needed to upgrade and maintain the online banking system.

Then, three other rural banks reportedly did the same to their customers, who tried to withdraw their capital on the banks' apps. 

It is a deeply-entrenched cultural habit in China to save up money for rainy days. According to a private insurance company's research this year, nearly 60 percent of mainland respondents have saved enough to live on for more than a year.

Making bank deposits is a common method for Chinese people to store their savings. This is why, according to unofficial estimates, the total sum involved in this incident amounts to 40 billion RMB (USD $5.71 billion).

Banks on fire

The Henan branch of the government’s money watchdog in mid-July said in a statement that it guaranteed people who made deposits of up to 50,000 RMB would get their money back. But this pledge had failed to tame the fury of protesters.  

Many depositors are desperate to be repaid. "Even if you have a lot of savings, it does not mean you have a higher ability to take liability," one of the victims who deposited a large sum of money wrote on Weibo, an online social media platform in China. "Some of our savings were amassed from several generations of the family."

That amount was then pushed up to 500,000 RMB on 29 August, confirming deposits in four rural banks to be repaid.  

A lawyer who specialises in business litigation in China told FairPlanet on condition of anonimity that the authorities’ decision to repay is aimed at maintaining social stability. He added that the police reveal insufficient information about the apparent fraud, making it hard to determine what kind of illegal behaviour has been perpetrated.

"Depositors need to wait until the investigation is completed before pursuing civil lawsuits," he said.

But although the government agreed to pay back victims, it posed one condition: "No advance payment will be made to those who obtain high interest rates through additional channels due to suspected participation in illegal fund-raising. If there is a violation, in accordance with the law by the judiciary."

Depositors, however, might be liable for engaging in illegal fundraising and face criminal charges for doing so. The lawyer said it is up to the judiciary to distinguish between legitimate savings and investment behaviors.

"If people participate [in investment] at high interest rates, it is possibly classified as investment behaviour, as they have to bear their own risk," he said.    

Meanwhile, the authorities arrested over 200 suspects who are believed to be led by a man named Lu Yi. Li owns four rural banks and illegally offered products for up to 18 percent interest rates to amass capital.  

Based on media reports, Henan New Fortune Group, one of the shareholders behind those banks, has used third-party internet financial platforms, self-operated platforms and a group of fund brokers to solicit deposits and sell financial products since 2011.

It has been suspected of related crimes for 11 years, and the funds may have been as high as 40 billion RMB, involving 400,000 depositors.

A system that perpetuates economic inequities

According to David Cai, a Chinese commentator, some enterprises are not qualified to apply for loans from state-owned banks, and therefore turn to rural banks.

"That is why the authority approved the existence of rural banks who use their capital to support small or medium-sized enterprises, even if they did not have a mortgage," he said.

"If those enterprises have difficulty in repaying loans, the financial risk shifts to the rural banks, putting depositors at risk."

The Chinese finance lawyer who chose to stay anonymous said that supervision on the banking system is needed to ensure the safety of customers' funds. 

In mid-August, seven Henan financial officials in the provincial supervision system were put under investigation for a month, including Jiang Honghua, director of Policy and Regulation Department, Henan branch of CBIRC. It is unclear to what degree these officials have been involved in this scandal.

"After [the suspects] violated the regulations, the regulators have turned a blind eye for many years and failed to play a regulatory role," Cai added. "If violations are punished severely, including criminal responsibility, village bank investors will be very cautious."

He predicts that in the future, with the exception of state-owned banks, regional banks will become riskier. People hoped to receive some interest in resisting inflation, but they failed, as the entire economy is now inactive.

"It is unrealistic for the disparity in China to change drastically," he said. "Recently, we are advocating collective prosperity, but there is no supporting system, which will lead to collective poverty."

He added that because the economy is inactive, the real interest rates are lower than before. He suggested that people keep their savings and prevent falling into the traps of products claiming a high return.  

Image by Joseph Chan.

Article written by:
Amy Liu
Embed from Getty Images
Many of the protesters fell victims to one of China’s largest bank fraud incidents in recent years.
Embed from Getty Images
Many elderly people and farmers poured their life savings into these products that promised a high interest rate of 4.3 percent.
Embed from Getty Images
People hoped to receive some interest in resisting inflation, but they failed as the entire economy is now inactive.
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