In central China, a crisis is brewing with growing worries from property-linked loans, angry depositors in the nation’s biggest bank scam and a viral video showing tanks being deployed on the streets.

Local authorities in central China’s Henan – the nation’s third most populous province with around 100 million people – are now cleaning up the property fiasco which has resulted in loan payment boycotts not only from owners of unfinished homes but even suppliers to property developers such as landscapers or sculpture makers. 

Following an emergency meeting by top government bodies and major banks, a team made up of bad debt manager Henan Asset Management Company and state-owned Zhengzhou Real Estate Group will work out funding issues for troubled developers. The team aims to revive stalled projects, sell assets and restructure businesses to ensure the completion and delivery of homes to contracted buyers.

Nation’s Biggest Bank Scam

Separately, the central province is still facing pressure from the ongoing developments of the nation’s biggest bank scam. In April this year, hundreds of residents in Henan were reportedly unable to withdraw savings from a handful of banks, leading to months of complaints and demonstrations. A key event was the headlined protest in July when 1,000 depositors at a People’s Bank of China branch were met by a violent mob of unidentified men in white shirts, according to reports citing a widely circulated video.

Authorities have publicly responded by first agreeing to repay individuals with deposits of up to 50,000 yuan ($7,400), at four banks in Henan and one in neighboring province Anhui, before recently expanding the coverage to deposits of up to 100,000 yuan. Local police have also named suspect Lu Yi as the leader of a criminal gang that allegedly transferred funds illegally via fictitious loans. 

Property Woes Handleable

According to a research report by DBS, China’s financial system is more than capable of withstanding the mortgage boycotts. In fact, it can absorb an estimated loan loss of 7.5 trillion yuan before triggering systematic risk, compared to the 1.1 trillion yuan of total mortgage value involved in the crisis.

Still, there are risks to the broader banking system should such a scenario play out such as lending hesitancy to certain sectors and additional pressures on China’s economic slowdown. 

Tanks Deployed?

And while the mortgage loan boycott appears to be primarily a financial concern, the bank scam that has hit savers – an estimated 40 billion yuan in deposits is missing – has resulted in public unrest with concerns about the potential for further escalation. 

In fact, some fear that the situation may have already escalated with another widely circulated video showing the deployment of tanks on the streets. Many media reports citing the video say that the tanks are positioned to deter protestors and protect targeted banks. But some cast doubt on the claims, identifying the location of the video not as Henan but east of it in a city in Shandong province.

Meanwhile, Beijing faces the difficult balancing act of reducing implicit government guarantees while attempting to maintain sufficient confidence, particularly at smaller banks, to prevent liquidity stress and achieve long-term financial stability. The country is home to nearly 4,000 small and medium-sized lenders that control a total of almost $14 trillion in assets.