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How Henan Bank Scammers Weaponized the Language of Inclusive Finance

Rao Yichen wrote . . . . . . . . .

On April 18, five village and township banks in the central provinces of Henan and Anhui did the unthinkable: Claiming “system maintenance,” they abruptly blocked depositors from transferring or withdrawing their money from their accounts.

Overnight, tens of billions of yuan were effectively frozen; some 400,000 account holders in provinces and cities across the country were affected. One entrepreneur lost as much as 40 million yuan. A single mother’s life savings disappeared. Medical bills became unpayable. Those who gathered in Henan to protest saw their local health codes mysteriously turn “red” — indicating a positive COVID-19 test or close contact with a COVID-19 patient — preventing them from traveling or entering the bank premises to withdraw their money in person.

The scandal soon took on national proportions, and not just because of the abuse of the health code system. This wasn’t a fly-by-night operation: The five banks were fully accredited and had marketed fixed deposit products to consumers all over the country via established and trusted fintech platforms like JD.com’s JD Digits and Baidu’s Du Xiaoman Financial.

The possibility that even accounts in the formal banking system might be scams has shaken public faith in the country’s banking system. A police investigation pointed the finger at the chairman of the banks’ corporate parent, the Henan New Fortune Group, but many depositors are still waiting to see what percentage — if any — of their money can be recovered.

At the policy level, the incident has cast a pall over a cornerstone of China’s “inclusive finance” campaign. Village and township banks first emerged as a distinct class of banking institution in China in 2006. At the time, the country’s large, brand-name banks were generally only willing to lend to state-owned enterprises, firms contracted to build government infrastructure, or companies that could show the kind of rapid growth needed to keep up with banks’ own high interest rates. One of my research participants told me that, as late as 2005, a private chemical plant he worked for with an annual income of 700 million yuan (then about $85 million) struggled to obtain bank loans at reasonable interest rates.

Village and township banks were meant to help address these gaps. Based in rural areas, they offered basic services to residents of China’s vast and largely unbanked countryside. After a short, three-year pilot period, the scheme was fast-tracked. Over 200 village and township banks were established in 2010 alone; by late 2021, there were 1,651 registered village and township banks nationwide, accounting for 36% of all Chinese banking institutions.

In economically developed coastal provinces like Zhejiang, village and township bank performances were relatively strong, but the majority of the banks, especially those in less-developed parts of central or western China, struggled. Residents of these regions have significantly lower incomes than on the coast and there are fewer rural enterprises with which to do business. Unable to compete with the brand recognition of more established commercial banks, village and township banks generally attracted clients rejected by other institutions.

In the face of these difficulties, much of the foreign and state-owned capital that had initially backed village and township banks faded away, leaving private capital dominant in an increasingly messy, competitive market.

Nevertheless, village and township banks were made a central part of a 2015 plan by the State Council — China’s cabinet — to promote inclusive finance. The goal was to reach people and businesses the traditional bank credit business was unwilling to cover, such as small- and micro-enterprises, farmers, low-income urban residents, and the poor and disabled, thereby boosting social equity.

The reality proved far more complex. Village and township banks have had a hard time competing with larger state-owned commercial banks. To poach depositors away from established competitors, they must offer higher interest rates, but the only way to cover these outlays is to charge higher interest on loans, which costs them their best potential customers.

Around this time, some village and township banks saw a possibility of survival in another key inclusive finance initiative: online banking and financial technology platforms. It was the peak of the peer-to-peer (P2P) lending craze and online platforms were marketing themselves as “financial innovations” for facilitating loans to small-, medium-, and micro-enterprises.

Many village and township banks, facing growing competition and under pressure to meet the needs of the inclusive finance campaign, sought to cash in on the fintech boom to fund their operations. They partnered with online financial platforms, allowing them to use their financial services licenses — and the air of legitimacy the licenses provide — in exchange for the ability to market “online deposit” products to the platforms’ national user base.

The scheme was relatively simple: depositors would sign up for a special deposit account with a bank through a third-party platform. Their savings would then be transferred from their primary account — typically at a larger commercial bank — to a new account at a smaller institution like a village and township bank.

For depositors, the benefits were obvious. The smaller banks, hungry for deposits, offered high interest rates — typically over 4%, compared to less than 3% at larger banks — to anyone willing to park their savings in an account. There was little reason to see the accounts as risky: Although interest rates were higher than average, they were still far below those promised by the now defunct P2P industry. And the institutions were all accredited banks included in the country’s deposit insurance scheme.

Strictly speaking, village and township banks are not supposed to take in deposits or hand out loans outside their base of operations. Because they are overseen locally, if they encounter problems outside their jurisdiction, it can have ripple effects elsewhere. But online fintech platforms let them quietly market their products to users across China.

The result was a shadow banking system in which small village and township banks, meant to serve local residents, were attracting funds from a wide range of users all over the country, causing regulatory problems and greatly increasing the risk of a cascading crisis.

Even before the Henan case, the government recognized the problem and moved to rein in online deposits. For example, in late 2020, 10 platforms, including Alipay and JD Finance, were ordered to delist all online deposit products.

That village and township banks had been involved in the industry and were exposed to the risks was not a secret. In early 2021, banks were banned from offering long-term fixed deposit products on third-party financial platforms under a new regulatory policy. But at least some institutions found ways to skirt the new rules. Several of the banks implicated in the recent scandal launched self-developed apps targeting online “savers.”

To reassure clients, many village and township banks used misleading language to imply their services were government-backed or approved. High-risk loans were reframed as “inclusive finance”; high-interest financial products were packaged as ordinary and safe “deposits” that were securely insured. This public-facing language, which promised legitimacy and credibility, covered for the banks’ “hidden script”: a reckless pursuit of risky profits. It also lowered people’s natural skepticism of tech-related scams. In the Henan case, in which app users’ money was supposedly saved through a bank app designed to look official, even bank employees failed to realize that the money was being redirected.

As recently as a few months ago, village and township banks were hailed as innovators in the field of inclusive finance. That praise has dried up during the Henan crisis, but the risks remain. This isn’t China’s first case of bank-related malfeasance. Now that the alarm has sounded, regulators must seriously examine and address the deep-seated problems plaguing the country’s financial institutions. Otherwise, depositors will keep falling for the same old tricks.


Source : Sixth Tone

China Sanctioning Taiwan Like Moving a Stone, Dropping it on Your Own Foot

Ralph Jennings, Ji Siqi and Luna Sun wrote . . . . . . . . .

Mainland China could target hundreds of billions of dollars worth of Taiwanese investments and two-way trade if tensions with the self-ruled island worsen after a sharp slide this week due to US House Speaker Nancy Pelosi’s visit to Taipei, analysts said.

But they are targeting the ruling pro-independence Democratic Progressive Party and probably saving any moves against high-value exports or direct investments as a final move, the analysts added, as measures against Taiwan could ripple back to the mainland.

“[Taiwanese] companies are such an integral part of the Chinese value chain that it becomes difficult to put too much pressure on those trade routes,” said Zennon Kapron, the Singapore-based director of financial industry research firm Kapronasia.

The People’s Liberation Army kick-started large-scale military drills following Pelosi’s arrival on Tuesday night, while Beijing has already rolled out various economic sanctions.

Chinese customs suspended imports of Taiwanese citrus fruits, chilled white scallops and frozen mackerel from Wednesday, extending the list of banned items to more than 1,000 products as cross-Strait relations have deteriorated in recent years.

The Ministry of Commerce also suspended exports of natural sand, a raw material needed for the construction of transport infrastructure and water projects.

“China’s constant opinion has been that any unilateral economic sanctions are double-edged. However, Pelosi’s visit might well push China into restricting certain imports from Taiwan and the US, but I do think that such restrictions will be very limited,” said Tao Jingzhou, an international arbitrator who has practised in Beijing, Hong Kong and London.

“As retaliation, the US might increase export control measures for technology and also increase scrutiny of activities of Chinese companies in the US. This visit will further deteriorate the US-China relations across the board.”

Mainland China will probably strike at farming and small manufacturers in parts of southern Taiwan where President Tsai Ing-wen’s Democratic Progressive Party has its main strongholds, said Chen Yi-fan, an assistant professor of diplomacy and international relations at Tamkang University in Taiwan.

Beijing hopes to influence Taiwan’s local elections in November, Chen said, with the party that wins most seats often shaping the outcome of the presidential race two years later.

Tsai’s ruling party takes a guarded view toward China, while its main opposition prefers a more conciliatory stance.

Beijing is expected to release sanctions “bit by bit” to gauge responses in Taiwan, said Yu Xiang, an adjunct fellow at the Centre for International Security and Strategy at Tsinghua University.

Export bans can be cancelled as quickly as they are announced and some have called the existing suspensions largely symbolic because farming and fishery exports make up just a fraction of Taiwan’s US$765 billion economy.

China had already banned imports of Taiwanese confectionery, biscuits, bread and aquatic products in the lead up to Pelosi’s visit.

“Processed food is not even in the top 10 items that Taiwan exports to China, so China’s move is currently only symbolic,” said Darson Chiu, a fellow with the Taiwan Institute of Economic Research’s international affairs department in Taipei.

Taiwan’s export economy runs on shipments of semiconductors and consumer electronics, followed by machinery and petrochemicals.

But to penalise key goods would hurt numerous Taiwanese people, stoking anti-Chinese sentiment, and strike at the mainland’s own economy, some analysts said.

“Taiwanese businesses are a major component of China investors, and Taiwan is part of China,” said Hong Hao, an author and independent China economist.

“Therefore, to sanction Taiwan is just like moving a stone and dropping it on your own foot, plus it deepens divisions between the two sides.”

The US-China trade war, which has been ongoing since 2018, has shown that sanctions aimed at one country hurt both sides, said Wang Huiyao, founder of Beijing-based think tank, the Centre for China and Globalisation.

“In the end, the US consumer and companies are paying the price for that. I don’t think that the economic sanctions are going to work,” Wang said.

“In the long run, we really have to find a way not to dissolve the status quo and really keep the peace and prosperity in the region.”

Any ban on imports of Taiwanese petrochemicals, machinery, transport goods and textiles would also violate the Economic Cooperation Framework Agreement trade deal signed by the two sides in 2010 when political relations had reached a peak, Chiu added.

Taiwanese investors have put money into mainland Chinese since the 1980s, and their 4,200 enterprises employ numerous staff, while they also help to drive economies near Shanghai and in the Pearl River Delta.

Taiwan-based Foxconn Technology and Pegatron make equipment for US multinational technology company Apple at mega factories in mainland China.

Lu Xiang, a researcher on US studies with the Chinese Academy of Social Sciences, said sanction will not be used as a major tool and that Beijing will refrain from escalating to a full-scale economic war.

“The mainland still aims for economic integration with the island over the long run. Companies which support pro-independence and some industries will be sanctioned or hit, but the impact will be limited. Mainland China is one of the only few trading partners that Taiwan has maintained a trade surplus with,” said Lu.

Chinese smartphone makers particularly depend on Taiwanese semiconductors, which the Boston Consulting Group said makes up 92 per cent of world’s capacity.

“I think the challenge for mainland China is the fact that it is so heavily reliant on the high-end chips and technology that’s coming out of Taiwan,” Kapron added.

Beijing views Taiwan as a breakaway part of its territory and has vowed to take back control of the island, by force if necessary, while it also resents US influence in Taiwan’s military or political space.

But Taiwanese leaders will make no policy changes in response to sanctions, according to Chen from Tamkang University, as neither side wants to look weak.

Tsai opposes China’s goal of unification with Taiwan and has courted foreign support for her cause since taking office in 2016.

“Now there is a deep distrust across the strait, so nothing Tsai does will bring comfort to the other side,” Chen said.

The Taipei government made no immediate comment in response to Wednesday’s trade bans, but Lo Ping-cheng, minister without portfolio and spokesman, said the cabinet would help business operators “respond appropriately” to any fallout from Pelosi’s visit.


Source : Yahoo!

Chart: Funds in China National Medical Insurance System

Source : Caixin

Chart: China Services Activities Continue at Expansion Mode

Source : Caixin

China’s Property Market Slump and Weak Demand Highlight Fragile Economic Recovery

Orange Wang wrote . . . . . . . . .

An unexpected contraction in China’s factory activity in July has highlighted the stubborn headwinds facing the world’s No 2 economy, a situation that may demand more active fiscal measures and support for the ailing property sector, according to analysts.

The official manufacturing purchasing managers’ index (PMI) slid from 50.2 in June to 49 last month, well below the 50-mark that separates growth from contraction on a monthly basis. A private survey also declined more sharply than analysts expected.

“The fastest period of recovery after the economic reopening is close to an end, with insufficient demand becoming a major constraint,” China Minsheng Bank said in a note on Sunday.

The private bank said the economy faced twin threats: weak demand overseas, with developed economies slipping into recession; while consumption and the real estate market were sluggish at home.

Simply relying on infrastructure investment was not enough to bolster the economy and more policy support was needed, the bank said.

Wary of fuelling the type of inflation ravaging Western economies, Beijing has ruled out large-scale stimulus, although it has made repeated calls for local authorities to help stabilise the economy ahead of a leadership reshuffle later this year. However, the increasingly precarious economic environment may mean authorities need to do more – and fast.

Liu Siliang, senior researcher at the Rushi Advanced Institute of Finance, said the property downturn was weighing on the whole economy, as the real estate sector and related industries accounted for about one third of gross domestic product (GDP).

China’s property sector has taken a sharp downwards turn over the past two years, due primarily to a regulatory crackdown on lending and the impact of the pandemic.

Output from the sector shrank by 7.0 per cent in the second quarter from a year earlier, the worst reading among all Chinese industries, according to government data. Among China’s top 100 developers, there was also a year-on-year drop of 39.7 per cent in contract sales in July, market data showed.

In the past month, mortgage-payment boycotts have erupted in a number of provinces.

“Although the government [worked] quickly to stop the spread of risks, it will take a long time for real estate to stabilise and recover, and residents’ expectations to change,” Liu said in a note on Monday.

At its half-year meeting on Monday, the People’s Bank of China said it would keep real estate credit, bonds and other financing channels stable, and explore new development models for the sector.

Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Bank, said the real estate market would be “the most important downside risk” for the Chinese economy this year.

The Politburo meeting last Thursday suggested that authorities might move to ensure cash-strapped developers had credit, he said, noting it also stressed the responsibilities of local governments in delivery of commodity housing units.

“That is supposed to be a positive signal,” he said.

The meeting mentioned stabilising the property market ahead of an oft-repeated line about curbing housing speculation. It also ordered local governments to ensure delivery of commodity housing units and make full use of policy tool kits.

“That is of great significance to stabilise market confidence, especially the sales market,” said Tao Chuan, chief macro analyst at Soochow Securities.

“But the direct effect on stabilising property investment is still limited,” he added in a note on Friday, expecting more measures by local governments in the second half of the year.

Ding said Chinese authorities are likely to issue an additional 1.5 trillion yuan (US$221.8 billion) of local special-purpose bonds in the second half of the year to boost the economy.

The Politburo sent a clear message that “expanding demand” should stand at the core of China’s fiscal and monetary policies. But it skipped any mention of the annual economic growth target of “around 5.5 per cent”, vowing instead to “strive for the best outcome” and maintain dynamic zero-Covid control as a priority.

The statement added to expectations that Beijing would not release another fiscal support package after unveiling a 33-point plan to stabilise growth in May.

Speaking at the World Economic Forum in late July, Chinese Premier Li Keqiang made it clear that Beijing will not flood the economy with stimulus.

“Under current circumstances, there is room in fiscal and monetary policies to achieve a fairly high growth rate in the second half of the year. But we cannot compromise future interests, and we need to both stabilise growth and avert inflation,” he said.

At a State Council meeting on Friday, Li said the third quarter was crucial for China’s economic rebound as it is the peak season for construction.

Projects receiving central government budgetary investment will be accelerated and local governments have been urged to expedite the use of special-purpose bonds, according to the meeting.


Source : SCMP

Chart: China Electricity Consumption Rose in June 2022

Source : 新华网

China Factory Activity Sinks, Weighing on Weak Economy

Joe Mcdonald wrote . . . . . . . . .

Chinese manufacturing’s recovery from anti-virus shutdowns faltered in July as activity sank, a survey showed Sunday, adding to pressure on the struggling economy in a politically sensitive year when President Xi Jinping is expected to try to extend his time in power.

Factory activity was depressed by weak global demand and anti-virus controls that are weighing on domestic consumer spending, according to the national statistics agency and an official industry group, the China Federation of Logistics & Purchasing.

A monthly purchasing managers’ index issued by the Federation and the National Bureau of Statistics retreated to 49 from June’s 50.2 on a 100-point scale on which numbers below 50 indicate activity declining. Sub-measures of new orders, exports and employment declined.

“Downward pressure is great,” said economist Zhang Liqun in a statement issued by the Federation. “The impact of the epidemic is still on the rise.”

The ruling Communist Party has stopped talking about this year’s official economic growth target of 5.5% after output shrank in the three months ending in June compared with the previous quarter.

The slowdown, which raises the risk of politically volatile job losses, adds to challenges for Beijing ahead of a ruling party meeting in October or November when Xi is expected to try to break with tradition and award himself a third five-year term as party leader.

An announcement Thursday by party leaders promised to “strive to achieve the best results” but avoided mentioning the annual growth target announced in March.

The party has promised tax rebates and other aid to help entrepreneurs after anti-virus controls temporarily shut down Shanghai and other industrial centers starting in late March.

The port of Shanghai, the world’s busiest, says activity is back to normal, but factories and other companies are operating under anti-virus controls that limit their workforces and weigh on production.

An index of production tumbled to 49.8 from June’s 52.8. New orders declined 1.9 points to 48.5. New export orders lost 2.1 points to 47.4.

Chinese leaders have avoided large-scale stimulus spending, possibly for fear of reigniting a rise in debt that they worry is dangerously high.


Source : AP


Source : Trading Economics

Infographic: 中国西瓜产量全球第一

Source : 新华网

Patriotic Fervour Erupts on Chinese Social Media Over Pelosi’s Visit

Patriotic Fervour Erupts on Chinese Social Media Over Pelosi’s Visit

Eduardo Baptista wrote . . . . . . . . .

The sight of the U.S. House of Representatives Speaker Nancy Pelosi arriving in Taiwan late on Tuesday was too much to bear for many mainland China internet users, who wanted a more muscular response from their government.

“Going to bed yesterday night, I was so angry I could not sleep,” blogger Xiaoyuantoutiao wrote on Wednesday.

“But what angers me is not the online clamours for ‘starting a fight’, ‘spare the island but not its people’…(but that) this old she-devil, she actually dares to come!”

China considers Taiwan part of its territory and has never renounced the use of force to bring the island under its control. But Taiwan rejects China’s sovereignty claims and says only its people can decide the island’s future.

Hashtags related to Pelosi’s visit, such as “the resolve to realise national reunification is rock solid”, went viral on China’s Weibo microblogging platform. By Wednesday, about a dozen of these patriotic hashtags had racked up several billion views.

Some bloggers even regarded Pelosi’s temerity as justification for an immediate invasion of Taiwan, with many users posting the term “there is only one China”.

Others said China’s military should have done more to stop her plane from landing, and thousands of users mocked a viral Weibo post published by an official People’s Liberation Army account last week that had simply read “prepare for war!”.

“In the future if you are not preparing to strike, don’t make these statements to deceive the common people,” said one user.

The highest level U.S. visit to Taiwan in 25 years has been furiously condemned by China, which has demonstrated its anger with a burst of military activity in the surrounding waters, and by summoning the U.S. ambassador in Beijing, and announcing the suspension of several agricultural imports from Taiwan. read more

Countering U.S. support for Taiwan is one of Beijing’s most important foreign policy issues, and state-controlled Chinese media has helped ensure public opinion firmly backs Beijing’s stance.

A livestream tracking the journey of Pelosi’s plane to Taipei by Chinese state media on China’s dominant chat app WeChat was watched by 22 million users on Tuesday.

But Weibo crashed before her plane landed, leaving users in the dark for about 30 minutes to an hour before and after Pelosi stepped onto the airport tarmac.

Without mentioning events in Taiwan, Weibo said on Wednesday the platform crashed because its broadband capacity was overstretched.

But the level of outrage on Weibo still hit fever pitch, with irate netizens calling for stronger military and economic countermeasures against Taiwan and the United States far outnumbering voices of moderation.

Still, there were people urging long-term patience in the face of mounting domestic challenges and unfavourable global sentiment towards China, as well as some for peace.

“If there really is a war, China will endure the suffering, currently the world powers have not really chosen team China, we would not get any help. Just like Russia, it would be a bit of a lonely war,” wrote one user.

Weibo, which censored calls for peace and criticism of Russia following the outbreak of the war in Ukraine, did not promote hashtags that criticised the outburst of nationalist fervour in response to Pelosi’s visit.

Qin Quanyao, a Beijing-based blogger, wrote an essay on Tuesday on WeChat in which he noted the current online jingoism harked back to the time of late Chairman Mao Zedong, when primary school children sang songs about the “liberation” of Taiwan.

“From Weibo, WeChat to various online platforms, the atmosphere suddenly became tense, seemingly returning to the era of ‘we must liberate Taiwan’ when we were children,” he wrote.


Source : Reuters

Chart: Home Prices in China Keep Falling

Source : Caixin