Recent protests in China's Henan province underline the risks being faced by banks as the real estate sector continues to struggle.
The real estate sector in China accounts for around 24 per cent of gross domestic product (GDP), almost a quarter of the nation's GDP, according to authors Ahana Roy and Siddhant Nair contributed to Organisation for Research on China and Asia.
For years the Chinese government tried to diffuse the debt fiasco and for that in 2020, Beijing introduced a policy to oversee and handle loan regulations for the real estate sector, commonly known as the "three red lines". Under this, the developers had to meet three criteria- liability to asset ratio lower than 70 per cent, net debt to equity ratio less than 100 per cent, and a ratio of cash to short-term borrowings less than 1.
Last year, the largest property developer, Evergrande Group defaulted on their interest payments, eventually leading to the slump of the entire industry. And the situation worsened by June 2022.
According to the authors, the sales and home prices fell, construction dropped, property loan growth slowed and consumer confidence weakened. Protests erupted across the country over the mortgage crisis and banking crisis, despite the market exhibiting signs of stability.
The Chinese financial system is in a precarious situation, brought on by its "poor capital turnover", liquidity stress, and global and domestic economic slowdown.
The dynamic zero-COVID policy, the Russia-Ukraine conflict, etc, have equally contributed to causing global anxiety over China's banks and real estate market.
A faltering Chinese economy, brought about by a struggling property market that would worsen the banking crisis, would have global consequences.
On July 10, over a thousand furious customers staged a mass protest at a Bank of China branch in Henan, demanding their savings be returned. The local government used plain clothes to suppress the protest.
Four rural banks in China's Henan province have frozen millions of dollars worth of deposits since April, threatening the livelihoods of thousands of customers in an economy already affected by Covid lockdowns.
The depositors have staged several demonstrations in the city of Zhengzhou, the provincial capital of Henan, but their demands are being ignored by the Chinese authorities, CNN reported.
Local banks in China have been plagued by systemic issues and riskiness, caused by increased housing prices, policy uncertainty, and shadow banking. After the global financial crisis, smaller banks and financial institutions were found to have a greater influence on the interconnectedness and stability of the Chinese banking sector.
As the Henan protests continue, protestors have made it clear that they are "against the corruption and violence of the Henan government". They have not mentioned the Communist Party of China, instead, they have invoked a sense of patriotism in their protests and have used Xi's "Chinese dream" slogan to put forth their appeals to the central government and protest the local government's crackdown.