China vows stricter checks on smaller banks after losses, abuses

The move comes after a scandal involving lenders in Henan province. PHOTO: REUTERS

BEIJING (BLOOMBERG) - China vowed to step up supervision of the nation's smaller banks and crack down on illegal activities after investors potentially lost billions of dollars in a suspected financial scam in Henan province.

The China Banking and Insurance Regulatory Commission will strengthen its oversight of shareholders at small- and medium-sized banks and restrain the behaviour of major owners, Mr Xiao Yuanqi, a vice chairman at the regulator, said at a briefing in Beijing on Thursday (June 23).

The move is part of measures to beef up corporate governance at the lenders, he said.

The pledge is the latest twist in a scandal involving lenders in Henan province with people claiming they have been denied access to their money and local officials changing pandemic health codes to prevent them from gathering to protest.

The misuse of something commonly used to track potential Covid-19 infections has drawn widespread condemnation, even from state media.

Earlier in the week, authorities in Zhengzhou, the capital of Henan, punished five officials for changing the health codes of more than 1,300 customers of the local banks to red, barring them from entering public places or taking public transport.

Mr Feng Xianbin, vice chief of the local political and legal affairs commission, was removed from his post, while Ms Zhang Linlin, another official at the commission, was demoted. They were not authorised to switch the codes, according to the city's anti-graft agency.

The local banks were allegedly used by an investment firm to illicitly attract tens of billions of yuan in funds. Local police have arrested suspects tied to a common shareholder in the financial institutions and seized some assets amid protests by investors who bought the savings products issued by the banks.

The banking regulator is working with local authorities on the case in Henan and asked them to protect consumers' rights, said Mr Xiao.

Overall, the risks at smaller banks in China is manageable after disposing of non-performing loans and replenishing capital over the past years, he added.

China has nearly 4,000 small and medium-sized lenders that collectively control almost US$14 trillion (S$19.5 trillion) in assets. But confidence in the nation's smaller banks has waned since 2019, when the government seized a bank for the first time since 1998 and imposed losses on some creditors.

Authorities have over the past few years disposed of 2.6 trillion yuan (S$539 billion) worth of bad debt at smaller banks, the CBIRC said in May. Beijing is also considering raising several hundred billion yuan for a stability fund to bail out troubled financial firms.

China has helped small banks shore up capital in the past, including by allowing local governments to issue special bonds, Mr Xiao said. The government now targets stepping up bad loan disposals and capital replenishing as well as improving corporate governance, he said.

Join ST's Telegram channel and get the latest breaking news delivered to you.