A state newspaper has given a rare glimpse of the risks facing China's shaky banking system, providing details of a frenzied four-day run on one of China's largest state banks. The incident took place in June at the local arm of the China Construction Bank in Luan County just outside Beijing, and was sparked by the local government's decision to shift the cash deposits it controlled out of the Construction Bank and into another government bank, a move that then triggered a run on individual deposits. Local officials confirmed the incident, which was previously unreported, but declined to say how much money was pulled out of the bank or why the Luan government suddenly decided to shift its deposits. The state newspaper put blame squarely on local government officials, saying their action violated the country's Commercial Banking Law, which was introduced several years ago. The official People's Daily paper said in an editorial note accompanying the article, "Let this case serve as a lesson to all levels of government and related officials that administrative interference in financial operations is strictly banned." With nearly $1.5 trillion in total deposits, China's state banks represent the lifeline of the country's economy.
While flush with cash, the big state banks are also plagued with a huge pile of bad loans that have left them technically insolvent according to western accounting principles. Beijing has started to address the biggest problems, introducing a raft of new rules and policies. Yet like with many parts of its economic reform campaign, Beijing's bid to fix its wobbly banking sector often meets resistance from local governments who for decades have run branches of the state banks as their personal fiefdoms. In Luan, the run started after officials transferred all local government deposits out of the Construction Bank in a single day. News swiftly spread through the county of 500,000 residents, located 160 kilometers east of Beijing.
Individuals decided to follow suit and four days later the run had extended to six of the Construction Bank's seven deposit outlets in Luan County, bank -officials said. The panic was finally quelled when local officials took to the airwaves to assure nervous depositors. Officials declined to say if Beijing offered a cash infusion to b the Construction Bank, which holds more than $250 billion in deposits. People's Daily said responsibility for the debacle rests with a senior local government official, Zhang Cheng, who it says has been removed from his position. Yet in a glimpse of the political jockeying that often takes place between Beijing and its local governments, a spokesman for Luan County said Mr Cheng hasn't been fired and continues to oversee county affairs.
The Asian Wall Street Journal
Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.