The banking crisis in China’s Henan province could just be the tip of the iceberg. The crisis has been brewing for years especially in the country’s smaller, rural lenders, which have typically remained outside the regulatory spotlight. These lenders, often fuelling shadow banking, have been piling up bad debts but challenges multiplied after Covid 19 pandemic hit the country’s economic growth.

The smaller, regional banks have played a crucial role in boosting China’s economy. But the deepening economic slowdown in the country, since the middle of the last year, is no more enough to provide the required cushion to the banking system. To add to this, the crumbling of the real estate sector, which has been one of the main drivers of growth in China and the subsequent zero Covid approach have severely ravaged the economy.

“The troubles at some village banks ought to be a wake-up call for more effective regulatory oversight of these banks, which tend to compete for deposits with higher-than-average returns; however, they might fail to repay deposits amid economic headwinds, Yi Xianrong, a professor of economics at Qingdao University was quoted by Beijing based Global Times as saying.

In April, lakhs of people were hit when several rural banks including Yuzhou Xinminsheng Village Bank, Zhecheng Huanghuai Community Bank, Shangcai Huimin County Bank and New Oriental Country Bank of Kaifeng froze withdrawals of deposits.

Minxin Pei, Professor, Claremont McKenna College wrote in an article in Nikkei Asia titled ‘China’s debt bomb looks ready to explode’, that the confidence in the safety of Chinese banks has been badly shaken by the failure of several small banks in Henan Province in April this year.

“Though the problem has existed, in fact got bigger, nobody took note of it as China’s massive economic growth was enough to absorb the shock but no more. The pandemic has hit the economy and subsequently the crumbling of the real estate sector has dealt a severe blow,” an analyst told India Narrative.

The fear among many is that the current banking crisis could be a precursor. However, the analyst added that there is no need to press the alarm button. “The regulators in the country are efficient and they will act to ensure that the crisis is arrested,” he said.

According to reports, there are about 4,000 small and medium-sized banks in China—more than 2,190 categorised as rural credit cooperatives, and 1,651 village banks. These banks manage assets worth 92 trillion yuan – almost 30 per cent of the total.

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China's economic crisis hits countryside after rural banks are told to freeze withdrawals