Apparently, the freezing of depositors’ money in China worsened the severe mortgage crisis. Both events were part of a larger financial crisis that emerged after years of indebtedness, unproductive investments, and the systematic increase in real estate prices of unfinished projects.
Henan province, with a population of about 100 million people, was the center of events and suffered the most serious economic scam. Four rural banks – Yuzhou Xinminsheng Village Bank, Zhecheng Huanghuai Community Bank, Shangcai Huimin County Bank, and New Oriental Country Bank of Kaifeng – froze just under $6 billion or 40 billion of their customer’s savings in April 2022.
These four banks, which focused their operations only on agriculture and the needs of the Chinese Communist Party (CCP), began to represent an economic risk when they started to look for external financing. They created alliances with internet financial services agencies that offered high-interest rate benefits.
This allowed these four banks to obtain financing and more clients, even from other provinces, which is why the problems then spread to Anhui province.
For example, they used the services of Du Xiaoman Financial, a financial services platform with interest rates of up to 4% per annum, which could be renewed for up to 5 years. However, these sources of financing were declared illegal by the CCP in 2021.
In April, unexpectedly and suddenly, these banks froze the clients’ money, arguing that it was a system problem. When it was prolonged, people worried about their savings began to demonstrate daily outside the banks, and a major shareholder of the four banks was arrested for “serious financial crimes.”
Customers of the 4 banks were defrauded
Following the massive demonstration by customers on July 10, criminal proceedings were initiated against the four banks. According to a statement from the Xuchang City Police Department, a “criminal gang” led by a man named, Lü Yi, were the suspects in the scam, with “several serious crimes” to their credit related to the issuance of illegal loans and the transfer of funds.
The gang reportedly gained control of several banks by illicit means, providing financial products through shell companies.
On July 15, the China Banking and Insurance Regulatory Commission (CBIRC ) and other financial regulators in Henan and Anhui ordered a refund to depositors with about $7,400 or 50,000 yuan in their accounts a week later. A second refund to those with almost $15,000 or 100,000 yuan and on July 29, a third payment to those with up to $22,000 or 150,000 yuan saved and frozen in banks. Finally, on August 5, people with accounts up to about $37,000 or 250,000 yuan were refunded.
But what will happen to savings in excess of 250,000 yuan?
In 2015 the CCP issued a Regulation on Insurance for Savings Banks to “protect the legitimate rights and interests of savers.” According to the regulation, commercial banks, rural cooperative banks, rural credit cooperatives, and other financial institutions in China are required to take out “deposit insurance of a maximum coverage amount of up to $75,000 or 500,000 yuan.”
However, the CCP fund insurance company was not set up until after May 24, 2019, and the People’s Bank of China established the insurance company with only $14.74 billion or 100 billion yuan in assets. By the end of 2021, the insurer had only $14.16 billion or 96 billion yuan after paying off $3.4 billion or 23.2 billion yuan in loans to stay afloat.
Customers of the four Henan banks should have been covered for up to $75,000 or 500,000 yuan. Although some customers claimed to have deposited much more money.
Apparently, customers with more than 500,000 yuan in one of the four banks would not get a refund because they obtained high-interest rates from financial service platforms, declared illegal. The Deposit Insurance Fund Management Company is not obliged to cover its losses.
On July 24, Li Huanting, a senior inspector of the Henan branch of the CBIRC, was placed under disciplinary investigation, allegedly for being involved in the actions of the four banks in question. On July 29, three more Henan officials were also investigated.
Since then, a domino effect caused the CCP to collapse in each Chinese province that could not even bear the costs of the pandemic or meet its GDP growth targets.
In an attempt to rescue the banking system, the Chinese Communist Party granted the provinces of Liaoning, Gansu, and Henan, and the city of Dalian $15.19 billion or 103 billion yuan in bonds, equivalent to 1 % of its GDP, and announced that it would deliver $47.18 billion or 320 billion yuan more by the end of August.
It is possible that financial pressure will increase in other provinces and that real estate prices will rise, not because of the high demand but because of the loans granted, which will produce a leverage effect on the system.
Mortgage crisis worsens
After the financial crisis, the mortgage market fell, buyers lost confidence and stopped investing, especially in a market like China, where it is normal to sell apartments under development, that is, with incomplete construction projects.
For example, of the housing projects sold in advance of 2013 and 2020, only 60% were delivered, according to Nomura, specialists in China’s economy.
In July, a group of people began complaining on the internet, threatening to stop mortgage payments if they were not delivered completed apartment projects. More than 320 projects were affected by the mortgage boycott.
Although China has laws and regulations that require developers to complete the construction of their housing projects, the CCP and banks allowed pre-sale funds to be deposited in developers’ accounts rather than being controlled by regulators.
Since September and October 2021, real estate prices have dropped, apartment sales have fallen, and adding to this, the collapse of Evergrande, ended up destabilizing the entire mortgage system. Threats by citizens to suspend their mortgage payments made matters worse.
Outstanding mortgages at the end of June amounted to $6 billion or 41 billion yuan, about 40% of GDP.
The CCP has been using quite risky debt structures for years, fostered by acts of corruption and fraud, and now, regardless of the method used by the CCP to get out of this pit, it will affect other sectors of the population that will suffer the consequences, possibly in the form of taxes, financial repression, inflation, wage reductions, and currency devaluation.