Scenes like those at the weekend – videos of the protests and the police response were circulated widely, and internationally, on social media – raise the risk of contagion within China’s banking system as depositors at other banks worry about losing access to their life savings.

Whether or not there is fraud involved in Henan, or if it is more a matter of the banks not being able to generate sufficient income to service the interest rates they offered to attract the deposits, it isn’t all that surprising that there are some stresses emerging within China’s banking system.

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The implosion of the country’s property sector (after a heavy-handed crackdown on leverage) has generated a string of major property developer defaults on their debts. It has also damaged local governments heavily reliant on income from property sales to developers as the developers’ sales to home buyers have more than halved over the past year, and had a wider impact on a Chinese economy where more than 30 per cent of GDP is exposed to the property sector.

Despite central government attempts to prop up the sector with rate cuts, relaxation of lending restrictions, incentives to take out mortgages and voucher programs for future home purchases, mortgage lending in the first quarter of this year was at its lowest level on record.

So dire is the plight of developers that some of them in rural China are now offering to accept garlic, wheat, barley and even watermelons as payment for deposits.

And the dominoes keep falling at the big end of the property sector. Last month, ratings agency Moody’s said it had downgraded 91 developers over the past nine months. In the decade to December 2020, it had only downgraded 56.

Analysts have estimated there have been 30 defaults by companies with more than $US1 trillion ($1.5 trillion) in debt since Beijing introduced its “three red lines” policy restricting developers’ leverage in late 2020.

Last week, Shimao Group defaulted on a $US1 billion bond and this week China Evergrande, which defaulted on its offshore bonds late last year, moved closer to a default on its domestic debt after creditors refused to extend a deadline for repayment of their debts.

A domestic default by Evergrande would have major ripple effects through the sector. Until now, it has been primarily foreign creditors and owners of uncompleted apartments bearing the brunt of the property sector’s losses.

There’s also another $US13 billion or so of foreign currency bond payments due before the end of this year, which could drive another wave of defaults.

China’s authorities are clearly concerned because they are creating a bailout fund with capital provided by the major financial institutions as a contingency against potential collapses of banks or insurers.

They would have an eye not just on the stresses within China’s domestic financial system but the increased volatility within international markets and the divergence between China’s monetary policies and those of the US and Europe, which are tightening their policies even as China is loosening its monetary settings.

While the official data is yet to show any signs of a blow-out in non-performing loans within China’s banking system, that data is viewed with some cynicism by analysts outside China. It is almost inconceivable that the turmoil within the property sector hasn’t had a material impact on bank balance sheets.

The COVID lockdowns (there’s been another outbreak in Shanghai), the general slowdown in China’s economy, an exodus of foreign capital as interest rates in the US rise, and fear of being caught up in the West’s sanctions on those doing business (as China is doing) with Russia won’t help.

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According to Bloomberg, Beijing’s Ministry of Finance is considering allowing local governments to sell the equivalent of $US220 billion of special bonds in the second half of this year, which would presage an attempt to generate growth through another big burst of infrastructure spending.

That’s another sign that the authorities are concerned about the trajectory of the economy and the vulnerability that its weakness might expose even as Xi Jinping readies himself for the Communist Party’s endorsement of an unprecedented third term as the party’s chairman later this year.

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