China’s mix of close state banking controls and freewheeling consumer-finance businesses is showing its social and economic strains. There’s the recent grassroots boycott on mortgage payments to protest big, overleveraged developers that sold homes and haven’t finished them. But before that, in May, an alleged multibillion-dollar bank scam triggered violent confrontations between protesters demanding their money back and police in Zhengzhou, the capital of Henan province. That scandal is shining a spotlight on China’s troubled rural banking system.
Investigating authorities say that Henan Xincaifu Group Investment Holding Co., the main shareholder of five rural lenders, colluded with bank employees to steal about 40 billion yuan ($5.9 billion) in deposits and investments. They used online platforms to pull in depositors and fabricated lending agreements to transfer the money, the authorities say. (Xincaifu has ceased operations, and the banks involved have asked affected customers to register information with them online in order to get money back.) The news has shaken confidence in the 3,800 banks that are crucial in providing credit to China’s vast, developing countryside. The central bank recently identified almost 300 rural lenders as high-risk institutions.