Bank runs in China, triggered by rumors on social media!

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China has too many banks with quite a few of them weak in corporate governance and earnings capacity. 

Shanxi Yangquan Bank, Hebei Baoding Bank and Hengshui Bank faced bank runs in June.

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A spate of bank runs breaks out in China, fuelled by social media

Charlie Zhu, Jun Luo & Zheng Li/Bloomberg
July 15, 2020 15:21 pm +08

SHANGHAI (July 15): Social media-fuelled rumours about banks collapsing are popping up at an unprecedented frequency in China, forcing regulators and even the police to step in to calm depositors.

Just since the past month, worried savers have descended on three banks to withdraw funds amid rumours of cash shortages that were later dismissed as false. Over the weekend, customers rushed to a bank in the northern Hebei province to take out money, prompting local regulators to publicly vouch for the soundness of its lenders as the police halted the run.

Confidence in the US$43 trillion banking system is eroding among the nation’s more than one billion account holders, threatening a cornerstone of China’s rise into an economic powerhouse. After several bailouts and the first bank seizure in more than two decades last year, the Covid-19 outbreak and its economic fallout have exacerbated an already-shaky situation in the world’s largest banking system.

“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, a Shanghai-based analyst at China International Capital Corp. “Once a rumour like this spreads, it brings immediate liquidity risk to a bank.”

For decades, deposit-taking has provided a stable and low-cost funding base for China’s financial market, playing a key part in the rise of its economy to the second largest in the world. Chinese households hold about 90 trillion yuan of bank deposits, more than anywhere else in the world.

Regulators are now not only seeking to soothe nerves publicly, but are also raising the protection to preserve this cushion for banks. The run in Hebei came after authorities kicked off a pilot programme to limit large transactions in the province.

Squashing rumours

In the most recent episodes, authorities stepped in last month to halt banks runs at two local lenders in Hebei and Shanxi. Last Saturday, savers rushed to withdraw money from Hengshui Bank Co, also based in Hebei, before the police put a stop to it.

In response, the local offices of the People’s Bank of China and the CBIRC said in a joint statement that Hengshui Bank and its branches are legitimate financial entities where any savings under half a million yuan are protected under China’s deposit insurance regulation. They reassured depositors that their money is safe and urged them not to “blindly” withdraw savings.

Police took people into custody, issuing reprimands to those spreading rumours, according to the statement.

For more:

https://www.theedgemarkets.com/article/spate-bank-runs-breaks-out-china-fuelled-social-media

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