People gather in front of a branch of Rural Commercial Bank of Huanghai in Yancheng yesterday after rumours that two small banks were in financial trouble swept through Jiangsu province. Photo: Reuters

Yancheng, China - Rural banks in China’s eastern city of Yancheng stacked piles of cash in plain view behind teller windows to calm depositors queueing at branches for a third consecutive day yesterday following rumours that they had run out of cash.

Residents of Sheyang county, which includes Yancheng, said panic began on Monday with a rumour that a branch of one local bank had turned down a customer’s request for a 200 000 yuan (R351 000) withdrawal.

Banks declined to comment.

The affected institutions are tiny compared with the scale of China’s financial sector, and the rush for cash appears to be an isolated incident so far. Rumours found especially fertile ground after a failure of three rural credit co-operatives, which are less regulated, in January last year.

Yet the news caught nationwide attention, reflecting growing public anxiety as regulators signal greater tolerance for credit defaults.

Miao Dongmei, who runs a baby supply store opposite the branch of the Jiangsu Sheyang Rural Commercial Bank first targeted by depositors, said she kept money at the bank, but did not join the stampede. But she said she had seen customers carrying baskets full of cash out of the branch, while armoured cars kept pulling up to deliver fresh loads of currency.

Sheyang bank staff said some branches had been open 24 hours for the past two days.

A visit to one branch showed tellers had stacked bricks of yuan notes immediately behind the glass, piled above head level, and assembled cash piles the size and height of a double bed in the back to show there was enough to go around.

Despite repeated appeals from local officials for calm, by Tuesday the run had extended to the Rural Commercial Bank of Huanghai, residents said.

Earlier yesterday, police and security guards stood by as dozens formed a long line outside while an electronic billboard urged depositors not to be worried by rumours.

The governor of Sheyang county posted a video on the county government’s website yesterday, urging depositors not to panic. “Please be assured that the People’s Bank of China and the rural commercial bank system will ensure the interests of all depositors will be protected,” Tian Weiyou said in the video. “The county’s rural commercial banks will ensure that there will be enough funds for depositors to withdraw at any time.”

Staff at the Sheyang bank handed out copies of a statement dated March 24, endorsed by the local branches of the central bank and the China Banking Regulatory Commission, as well as the Zhejiang Sheyang Rural Commercial Bank. “The Sheyang bank has total deposits of 12 billion yuan, the most in Sheyang county; its capital position is very strong.”

Bank runs in Sheyang highlight the risk of crises in the sprawling, less regulated shadow banking sector spilling over to the rest of the industry.

Beijing intends to allow market forces to play a greater role in the economy to cut the wasteful investment that fuelled the country’s breakneck expansion for the past three decades and help produce more sustainable and longer-term growth.

The bank runs highlight the need for regulators to move quickly with a deposit insurance scheme to prevent isolated incidents from undermining confidence in the system.

Sheyang residents, many elderly, who had lost money in the collapse of rural credit co-operatives were first in line to withdraw once the bank run started. – Reuters