Withdrawal symptoms

When Cuba Gooding’s character in Jerry Maguire demanded that his agent show him the money, he left that year’s Oscars with an award for Best Supporting Actor.

But for savers at Jiangsu Sheyang Rural Commercial Bank last month, the performance was rather different. Yes, they too were given a glimpse of the cash. But in their case it was piled up to the ceilings behind the tellers at their local branch. After crowds started gathering outside branches in Jiangsu province, bosses were hoping that the mountains of banknotes would encourage panicky depositors to leave their money where it was, rather than take it home with them.

The bank run happened in Yancheng county and was said to have begun after a request to withdraw Rmb200,000 ($32,216) from a Sheyang branch was turned down the Monday before last. Over the next two days queues began to form at the bank and some of its other branches. Locals told CBN that smaller depositors came first, withdrawing Rmb20,000 or Rmb30,000 at a time. But as the crowds got bigger, larger depositors started turning up too. The panic then spread to another lender, Rural Commercial Bank of Huanghui, which was also deluged by customers wanting to take out their money.

Apart from rumours about the refused withdrawal, there was little to indicate why the panic should have suddenly taken hold. Parts of the foreign media have pointed to the role of the bond default at Chaori Solar (see WiC229) in making the public nervous, as well as the commentary from senior officials that banks cannot expect to be bailed out whenever they get into trouble.

An example of the latter was the warning from Yan Qingmin, the deputy chairman of the China Banking Regulatory Commission. He said that bankruptcies are a possibility if banks aren’t able to meet their obligations. Yan then told reporters the CBRC wants to change the view that banks are backstopped by the government to one in which the guarantees come from the rest of the financial system. Presumably this was a reference to regulations that will soon require banks to pay a levy towards a new deposit insurance scheme, a move expected to come into effect before interest rates on deposits are liberalised.

But last week’s anxious crowds were farmers and lowly paid workers – not the kind of audience that picks up on policy nuances from Beijing or which typically has much idea about the riskier reaches of the corporate bond markets.

More likely the panic was provoked by immediate experience – after investors in Yancheng were hit by the failures of a number of rural cooperatives and farmer credit unions in recent months.

Last year there were at least 120 of these companies taking deposits and lending money in Yancheng, CBN reports. In the largest collapse a group of lenders failed in January, wiping out about Rmb80 million of depositor capital.

“Because ordinary people have been scammed by the credit guarantee companies, when they hear that the banks might also have problems, they come right away and pull their cash out,” the chairman of Sheyang Rural Commercial Bank complained on state radio.

Lending cooperatives began appearing in Jiangsu in 2006 after new guidelines gave the go-ahead for new rural financial institutions (the aim: to boost investment in agriculture). Members who paid contributions into the co-ops could get loans, but they also took on the risks from lending to one another. The co-ops were regulated lightly, often by agriculture officials with little experience of financial oversight, and many shifted into riskier lending to factories or worse still to real estate firms struggling to get bank loans.

Worryingly, they’ve now demonstrated to Yancheng’s bankers they can trigger financial contagion.

Sheyang Rural Commercial Bank is hardly a major player in the financial world, with a deposit base of about Rmb12 billion or 0.01% of the total assets in the banking system. But for an international media hunting for signals that China is headed for a financial malaise, the bank run was further evidence of dark days ahead.

By contrast, the bank did everything it could to convince customers that their concerns were unfounded.

“Savers’ deposits are protected by law. There is no situation in which we cannot meet cash withdrawal demands. Depositors must not listen to rumours and cause unnecessary panic,” it told its customers.

“I assure you the bank will be operating as normal today, tomorrow or in three years’ time,” the local mayor Wei Gouqiang confirmed to depositors. “Do you know whom the bank is backed by? It is the government.” Within three days the bank run had subsided; a local man has also been arrested for spreading rumours about the cash crisis.

Shanghai Business said the response was handled well. By stepping in, the local government let savers know that ordinary deposits are fully protected, the newspaper believed.

In fact there isn’t an explicit legal commitment that the central government stands behind all bank deposits. The banking regulations suggest that the People’s Bank of China can take on a role in supporting lenders in danger of insolvency, Reuters says, and depositors also have the technical right to sue for the return of deposited funds. But there’s no formal promise that the PBoC will intervene, while the procedures for how bank liquidations are handled by the courts are fuzzily defined, making it unclear that obligations to depositors will always be met.

Yet these are legal niceties as far as most depositors are concerned. It’s hard to blame them: while the CBRC has been trying to deliver a more nuanced message, officials in Yancheng did everything they could to reinforce the view that the state guarantee on deposits is watertight.

The landscape may be about to change, however. Regulators have been discussing deposit insurance for years but they are now thought to be on the verge of implementing it. It was given a very specific mention at the National People’s Congress in March, for instance, and the Economic Observer says that the authorities are only waiting for the best time to launch it.

Modelled on similar arrangements in other countries, the insurance won’t protect all deposits, according to reports from Shenyin Wanguo Securities. It believes that the first Rmb500,000 ($80,500) of cash will be covered. Cash in wealth management products and other funkier investments isn’t likely to be included in the guarantee, either.

The news is telling, especially for wealthier savers, and is set to put an end to the assumption that money left in banks is always safe. Deposit insurance highlights the opposite – that there are always risks – and some analysts believe that customers will move their money to the bigger, better-capitalised lenders as a result.

But Zhong Zhengsheng at Guoxin Securities told Tencent Financial that an insurance scheme will also help ring-fence the impact of individual bank failures on the wider financial system.

Meanwhile the mooted limits imply that full coverage will only extend to smaller customers – but as Zhong adds, these are usually the savers who lack much awareness of the banking environment, and the ones that the government views as most in need of protection.

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