China Brief
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The Chinese Protesters Who Got What They Wanted—Sort of

Does a compensation scheme for failing banks mean the start of more accountability for China’s financial sector?

James Palmer
By , a deputy editor at Foreign Policy.
Chinese demonstrators hold banners during a protest over the freezing of deposits by rural-based banks outside a People’s Bank of China building in Zhengzhou, China, on July 10.
Chinese demonstrators hold banners during a protest over the freezing of deposits by rural-based banks outside a People’s Bank of China building in Zhengzhou, China, on July 10.
Chinese demonstrators hold banners during a protest over the freezing of deposits by rural-based banks outside a People’s Bank of China building in Zhengzhou, China, on July 10. Weibo via EYEPRESS/Reuters

Welcome to Foreign Policy’s China Brief.

Welcome to Foreign Policy’s China Brief.

The highlights this week: A mass protest in Zhengzhou leads to (some) government action on village banks, former Japanese Prime Minister Shinzo Abe’s death is celebrated by online commenters, the Australia-China reset faces a setback, and the fourth volume of Xi Jinping Thought is a guaranteed bestseller.

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Bank Protesters Want to Know Where Their Money Went

A mass protest on Sunday in Zhengzhou, the capital of Henan province, was suppressed by a combination of plainclothes and uniformed police—but the protesters still achieved at least part of their goal. Hundreds of people gathered outside the city’s main branch of the People’s Bank of China, China’s central bank, calling for investigation and compensation after a scandal involving four Henan village banks, and one in Anhui, left thousands of depositors unable to withdraw funds.

Videos of the protesters being attacked by police spread on Chinese social media, prompting expressions of support. Protesters chanting “Gangsters! Gangsters!” blamed not only the banks but also unspecified local officials whom they accused of being complicit in stealing the money. Last month, there were reports of China’s ubiquitous health code apps being used by local officials to restrict the movement of bank customers who were planning protests; these reports sparked outrage from the public and denunciations from state media, leading to an end to the tactic.

Protests like Sunday’s are common and have a clear goal. They’re not just an expression of anger but a conscious group lobbying effort with an immediate target. Successful collective action works by playing on both the Communist Party’s fear of instability and local officials’ dislike of having problems publicized—because that might cause higher authorities to take a closer look. The number of protests is also one of the metrics used to evaluate officials’ career performance, giving them an incentive to forestall future incidents.

This tactic of collective action is often successful, whether getting back pay for miners or property taxes rolled back. The traditional protest-handling approach combines stick and carrot: mass force backed by an exhaustive security apparatus to shut down the protests, followed by at least a partial fix for the problem, normally by paying people off. And lo and behold, on Monday regulators announced a compensation plan aimed at smaller investors with funds of under 50,000 yuan ($7,500) first and larger ones later. The government also announced the arrests of a supposed “criminal gang” it said had taken over the banks.

Similar problems are likely to come up again soon. China has around 4,000 village banks, encouraged through concerted government incentives in the last decade to try to extend credit to an underserved rural population. Many of them are undercapitalized and burdened by bad loans, prompting calls for consolidation. Like just about every lender in China, they are overwhelmingly invested in a construction and real estate market that’s rapidly deflating across the country.

Village banks can also act as vehicles for local corruption. And with local government incomes increasingly tight, who shoulders the bill for payouts like this one is unclear and likely to produce internal government squabbling.

A lack of a clear compensation process drove the protests. China introduced a deposit insurance plan in 2015, yet it has never been called on. (Before 2015, there was an implicit guarantee that the government would step in but not a formal scheme.) When, in 2019, the authorities took over Baoshang Bank, an Inner Mongolian institution linked to the financial empire of fallen tycoon Xiao Jianhua, it was the first private lender to be taken over in 20 years. Creditors ended up taking a hit after the lender was declared bankrupt and wound down a year later.

The government has bailed out some banks—but without yet making use of the deposit insurance plan. (In contrast, the U.S. Federal Deposit Insurance Corp., for instance, routinely handles bank failures.) Chinese investors trust strongly in the likelihood of official bailouts, since the government fears instability more than moral hazard. The economist Ning Zhu calls this pattern the “guaranteed bubble,” an implicit promise from the government that Beijing will cover all sorts of financial activities that would not be guaranteed in a normal economy, including real estate. That belief is especially strong among the urban upper-middle classes that are the bedrock of party support. When lines go down, people turn out on the street.

It remains unclear whether the accounts of the protesters would even be insured under the as-yet-untested deposit insurance scheme. At least some were not regular savings accounts but rather high-interest wealth management products that aren’t covered. Whether the customers knew this or not is unclear; the rural banks seem to have been taking deposits from outside of the areas they were supposed to cover, in risky schemes tied in with online financing, but some customers also brought the products directly through online platforms. Still more of the deposits appear to have been kept off the balance sheets altogether.

Scams and fraudulent accounting are common in online wealth management in China. A series of scandals around peer-to-peer lending and other schemes in 2018 prompted a severe crackdown on the sector. Customers of collapsed firms such as Qbao often protested in the hope of receiving government compensation, with some limited success.

Wealth management products have often been sold as if they were regular bank accounts or had the backing of powerful institutions, especially to relatively financially illiterate audiences—or ones convinced that the government would eventually assume the risk. And with bank locations closed and some online services shuttered—the banks involved don’t want people to be able to withdraw money or access their details—customers have also been unable to access the documents proving the nature of their accounts.

As a combination of the real estate crisis and zero-COVID-induced slowdown hits Chinese finance, expect more protests. Implicitly, that involves staying within certain limits. As Elizabeth Perry put it in a 2010 paper, “savvy protesters frame their grievances … in officially approved terms in order to negotiate a better bargain with the authoritarian state.” In this case, the protesters were asking the central government to exercise its authority; if they had questioned it, it’s likely the state would have come down harder.

Of course, the lines of acceptable behavior can also shift unexpectedly. Protesters in Beijing who organized on WeChat in 2018 to demand compensation for online scams were rounded up even before the march happened and the area was locked down, thanks to a combination of the capital’s sensitivity and a crackdown on group chats.

What We’re Following

Abe’s death celebrated. The assassination of former Japanese Prime Minister Shinzo Abe prompted celebration from many segments of the Chinese public, with businesses offering discounts to commemorate the event, online comments such as “Is the gun OK?” and champagne emojis, and a general sense of glee among nationalist posters. There was also some strong pushback, including thoughtful reflections on the danger of violence.

Abe was an extremely unpopular figure in China. He made visits to the Yasukuni Shrine, which commemorates the Japanese war dead—including war criminals who committed atrocities in China—and practiced historical denialism. The Chinese government offered muted condolences to Japan on Abe’s death, using language a step below that usually used for former leaders. State media attempted to defend the triumphant online comments, claiming that they showed China allows debate; in truth, as witnessed many times before, the censors rapidly close discussion on unacceptable topics and pro-Western speech but are extremely tolerant of ultranationalist sentiments, even when they’re not sanctioned by the government.

Australia reset stalls. An attempt at reconciliation between Beijing and Canberra has gotten off to a poor start after China presented Australian Foreign Minister Penny Wong with a list of four actions that Beijing said were needed for a reset of the relationship. While the list was vague—“see China as a partner rather than a rival” and “not be controlled by any third party” (a clear reference to the United States)—it brought back memories of the list of 14 demands that Beijing presented to Canberra in 2020, which helped drive the relationship to new lows. While the Labor government in Australia is keen to mend at least some of the damage with the nation’s largest trading partner, the Australian public views China as a threat.

Read Xi Jinping Thought. Fans everywhere have been eagerly awaiting the launch of the fourth volume of Chinese President Xi Jinping’s collected writings, the purchase and study of which are, of course, compulsory for Communist Party members. Xi’s writing is exactly as turgid as you would expect, but Xi Jinping Thought has been pushed far more heavily than writings by any of his predecessors since Mao Zedong, via elementary school textbooks, university campuses, and apps.

The launch of the new volume will once again lead to a spike in time spent studying Xi Jinping Thought, at least in the months before the 20th Party Congress in the fall. That burden doesn’t just fall on government and state-owned businesses: Around 48 percent of private enterprises (and 92 percent of the top 500 companies) include party cells where such study sessions are compulsory.

Tech and Business

Macao shutters casino doors. With COVID-19 infection numbers rising, Macao has announced the closure of all of the city’s casinos, dealing a devastating blow to the territory’s economy. The city’s population is some 680,000, and there are only around 1,400 reported COVID-19 cases, but the authorities are fearful of a disaster such as the wave that hit Hong Kong this year—and mainland authorities worry about gamblers taking the disease back home.

Macao’s economy is almost entirely dependent on gambling; when the pandemic hit in 2020, Macao’s GDP dropped by a staggering 56 percent. Gaming shares fell sharply after news of the new lockdown.

But COVID-19 isn’t Macao’s only problem. The mainland government is increasingly uncomfortable with the existence of the gambling haven, mostly because it’s a major vehicle for money laundering. The government has been pushing an idea, reiterated during this lockdown, that the casinos can switch to family-friendly entertainment. But however much money gets poured into such a scheme, it is ultimately a non-starter; Macao’s entire appeal is that gambling, unlike theme parks, is illegal on the mainland and in many other Asian countries. And while the city has beautiful old Portuguese architecture and culture that might allow some tourist diversification, much of that is being torn down or trampled over for new construction.

Economic drop. Indicators from freight traffic to retail sales strongly suggest that Chinese GDP fell last quarter as a result of mass lockdowns, an increasingly nervous public mood, and supply chain snarls. That’s not going to stop the government claiming GDP growth, with the official figure, due next week, likely to be in the 1 to 2 percent range. GDP fraud is routine in China, both by provincial governments under strong pressure to produce good numbers and as a result of massaging by the central government itself. But in past times this meant overstating real growth, rather than covering up an actual fall. And while there has been some recovery, the chance of new lockdowns is still making the public—and investors—very risk-averse.

James Palmer is a deputy editor at Foreign Policy. Twitter: @BeijingPalmer

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