Rumor sparks run on Chinese bank

Panic: Fear that China's fifth-largest bank may have been embezzled prompts thousands to pull out their savings

Banking

April 24, 1999|By Frank Langfitt | Frank Langfitt,SUN FOREIGN STAFF

ZHENGZHOU, China -- In what may be one of the first runs on a large national bank in China, thousands of people descended on the state-owned Bank of Communication here this week demanding their money after rumors surfaced on the Internet that the bank's director had run off with huge sums of cash.

The episode, which seems not to have been reported in China's state-controlled national press, highlighted in unusually human terms some of the problems facing the nation's troubled banking system.

At least one fistfight broke out as worried customers waited in lines stretching to more than 300 people and bank branches stayed open until at least 8 o'clock in the evening to meet depositors' demands, witnesses said.

Customers described bank employees carrying in bags of cash from outside to pay out accounts while police posted notices on bank windows threatening to arrest anyone who spread rumors of financial impropriety.

"Don't believe the rumors! Don't be deceived!" read a notice taped to the door of one branch of the Bank of Communication, the nation's fifth largest.

After the bank's director, Deng Shiming, denied the rumor on local television and pledged to honor all deposits, the run -- which began Tuesday -- ended Thursday.

Police reported the arrest of two young computer engineers, who they said had sparked the panic by posting the claim on a Web page. Authorities did not suggest a motive.

Officials at the bank's Shanghai headquarters said they could not yet provide figures on how many customers removed their funds or how much money was involved in the mass withdrawal.

A Western diplomat said the run was the first he had heard of involving a major Chinese commercial bank, although he said there could have been others.

He added that the panic seemed linked to depositors' lack of sophistication and the lack of deposit insurance, which the government has been talking about creating.

China's savings rate -- about 30 percent by some estimates -- is one of the world's highest. Yet, Chinese place most of their money in state-controlled banks that have no deposit insurance.

In recent years, citizens have invested heavily in questionable investment companies supported by the government, only to see managers flee the country with their money. It was just such an incident two years ago in Zhengzhou involving a firm called Three Star that gave credence to the rumors about the Bank of Communication.

"I don't believe" the government, said Li Longzhen, 58, an accountant at a guest house in this central Chinese city of about 1 million.

Li recalled how the government touted Three Star and officials tried to calm investors' fears. In the end, though, the company paid off only 30 percent of Li's investment and she lost about $1,700 -- more than twice China's urban per capita income.

"I learned a lesson from the Three Star case," said Li, who is still debating whether to pull her money out of the Bank of Communication.

Many economists regard China's banking system as an Achilles' heel of the country's economy.

Instead of lending money based on an objective analysis of projects, China's big four commercial banks have provided huge sums -- essentially subsidies -- to prop up the nation's failing state-owned enterprises.

Many of the enterprises are relics from the days of China's centrally planned economy and serve as employment agencies and sources of political stability as the government continues to lay off millions of workers.

Optimistic estimates put the percentage of bad loans at between 20 percent and 25 percent, leaving the top commercial banks technically insolvent. Chinese depositors have not tried to pull their money out because most have no idea the institutions are carrying such a heavy debt burden -- the state-controlled media do not emphasize such things.

Most customers also believe that the government, which owns the banks, would never allow them to fail.

"It's totally impossible," said Lin Wenjian, a 26-year-old restaurant and billiard hall owner who has nearly $2,000 in the Bank of Communication. "If it collapsed, financial institutions would be in total chaos."

Earlier in the week, China opened its first asset-management company to begin chipping into the mountain of bad debt. China Cinda Asset Management Co. will try to handle the problem at China Construction Bank by selling debt, restructuring businesses, making loans and issuing bonds.

Economists say that despite the bad loans -- one Chinese official recently estimated that it would take at least $61 billion to clean up the problem -- deposits continue to grow and the government should have enough reserves to solve the problem over time.

"Overall, I don't see any general decrease in confidence in the banking system," the Western diplomat said in Beijing.

Despite the Bank of Communication's good reputation in China, the allegations of fraud posted on the Internet proved to be too much for many here.

At the height of the panic Wednesday, Zhang Zhongyi, a 30-year-old doctor, withdrew the $7,200 he is saving for a house.

"I don't believe the Bank of Communication will go bankrupt, but it's all I have so I took it out," he said. "After things calm down -- if nothing happens -- I will put my money back in."

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