Hundreds rush to rural Chinese banks after solvency rumours

People gather in front of a branch of Jiangsu Sheyang Rural Commercial Bank, in Yancheng, Jiangsu province, March 25, 2014. Hundreds of people rushed to withdraw money from a branch of a small Chinese bank on Monday after rumours spread about its sol
People gather in front of a branch of Jiangsu Sheyang Rural Commercial Bank, in Yancheng, Jiangsu province, March 25, 2014. Hundreds of people rushed to withdraw money from a branch of a small Chinese bank on Monday after rumours spread about its solvency, local media reported, reflecting growing anxiety among investors as regulators signal greater tolerance for credit defaults. --PHOTO: REUTERS

SHANGHAI (REUTERS) - Hundreds of people rushed on Tuesday to withdraw money from branches of two small Chinese banks after rumours spread about solvency at one of them, reflecting growing anxiety among investors as regulators signal greater tolerance for credit defaults.

The case highlights the urgency of plans to put in place a deposit insurance system to protect investors against bank insolvency, as Chinese grow increasingly nervous about the impact of slowing economic growth on financial institutions.

Regulators have said they will roll out deposit insurance as soon as possible, without giving a firm deadline.

Domestic media reported, and a local official confirmed, that ordinary depositors swarmed a branch of Jiangsu Sheyang Rural Commercial Bank in Yancheng in economically troubled Jiangsu province on Monday.

The semi-official China News Service quoted the bank's chairman, Zang Zhengzhi, as saying it would ensure payments to all the depositors. The report did not say how the rumour originated.

Chen Dequn, a resident in Yandong, just outside Yancheng, said she saw a crowd of about 70 to 80 people gathering in a branch of Sheyang Rural Commercial Bank in her town on Tuesday. "At the moment there are about 70 or 80 people in there. Normally there'd only be about 10," she told Reuters by telephone.

Officials at another small bank, Rural Commercial Bank of Huanghai, said they had faced similar rushes by depositors, triggered by rumours of insolvency at Sheyang.

"We will be holding an emergency meeting tonight," an official at the bank's administration office told Reuters, but declined to comment further.

Why Yancheng investors suddenly lost confidence in the security of their bank deposits is not clear, given that the Sheyang bank is subject to formal reserve requirements, loan-to-deposit ratios and other rules to ensure it keeps sufficient cash on hand to meet demand.

Bank failures in China are virtually unknown, as Chinese banks are considered to operate under an implicit guarantee from the government.

China's central bank governor said this month that deposit rates are likely to liberalised in one to two years - the most explicit timeframe to date for what would be the final step in freeing up banks to set their own interest rates.

It is widely expected to introduce a deposit insurance scheme before freeing up deposit rates, to protect savers in case a liberalised market puts major strains on smaller banks and alarms the public. Analysts also expect the controls on deposit rates to be lifted gradually.

Investors both in China and globally have taken note of Beijing's recent decision to allow China's first domestic bond default. Chaori Solar Energy Science and Technology Co Ltd missed a bond coupon payment in March. Officials have indicated publicly that they believe other defaults are inevitable but do not believe such incidents will lead to systemic risk.

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