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The Anatomy Of Panic: How A Rumor Mutated Into A Three-Day Chinese Bank Run

Tyler Durden's picture




 

Yesterday we showed the end result of what happens in a China, in which bankruptcy and default are suddenly all too real outcomes for the country's hundreds of millions of depositors, when the risk of losing all of one's money held in an insolvent bank becomes a tangible possibility in "What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors." Today, we look in detail at all the discrete elements that culminated with hundreds of Chinese residents lining up in front of a bank in Yancheng and rushing to withdraw their money only to find their money not available (at least until the regional government was forced to step in with a bail out to avoid an even greater panic).Why is this a useful exercise? Because since we will certainly see many more example of it in the near future, it pays to be prepared. Or least it certainly prevents one from losing all of their money...

This is what happened, and when it happened, it happened quick. From Reuters:

The rumour spread quickly. A small rural lender in eastern China had turned down a customer's request to withdraw 200,000 yuan ($32,200). Bankers and local officials say it never happened, but true or not the rumour was all it took to spark a run on a bank as the story passed quickly from person to person, among depositors, bystanders and even bank employees.

 

Savers feared the bank in Yancheng, a city in Sheyang county, had run out of money and soon hundreds of customers had rushed to its doors demanding the withdrawal of their money despite assurances from regulators and the central bank that their money was safe.

 

The panic in a corner of the coastal Jiangsu province north of Shanghai, while isolated, struck a raw nerve and won national airplay, possibly reflecting public anxiety over China's financial system after the country's first domestic bond default this month shattered assumptions the government would always step in to prevent institutions from collapsing.

 

Rumours also find especially fertile ground here after the failure last January of some less-regulated rural credit co-operatives.

And since nothing beats a first person account here is just that, courtesy of Jin Wenjun who saw the drama unfold.

He started to notice more people than usual arriving at the Jiangsu Sheyang Rural Commercial Bank next door to his liquor store on Monday afternoon. By evening there were hundreds spilling out into the courtyard in front of the bank in this rural town near a high-tech park surrounded by rice and rape fields.

Bank officials tried to assure the depositors that there was enough money to go around, but the crowd kept growing.

In response, local officials and bank managers kept branches open 24 hours a day and trucked in cash by armoured vehicle to satisfy hundreds of customers, some of whom brought large baskets to carry their cash out of the bank.

Jin found himself at the bank branch just after midnight to withdraw 95,000 yuan for his friend from a village 20 kms (12 miles) away.

"He was uncomfortable. It was late and he couldn't wait, so he left me his ID card to withdraw his cash," Jin said.

By Tuesday, the crisis of confidence had engulfed another bank, the nearby Rural Commercial Bank of Huanghai.

"One person passed on the news to 10 people, 10 people passed it to 100, and that turned into something pretty terrifying," said Miao Dongmei, a customer of the Sheyang bank who owns an infant supply store across the street from the first branch to be hit by the run.

Claiming to be a Yancheng resident, one user of Sina Weibo's Twitter-like service repeated the story on Monday about the failed 200,000 yuan withdrawal, adding that "rumours are the bank is going bankrupt."

When later contacted by Reuters online, he said he had heard the rumour from his mother when she came back from town. Huanghai and Jiangsu Sheyang banks declined to comment.

China's banks are tightly controlled by the state and bank bankruptcies are virtually unheard of, so the crisis has baffled many outsiders.

Yet in Sheyang, fears of a bank collapse resonate.

In recent years, this corner of hard-strapped Jiangsu province has experienced a boom in the number of loan guarantee, or 'danbao', companies and rural capital co-operatives.

These often shadowy private financial institutions promised higher returns on deposits than banks, but many have since failed.

Qu Guohua, a spiky haired former migrant worker in his 50s, nearly lost 30,000 yuan in a credit guarantee scheme that went up in flames.

What saved him one day in January 2013 was a tip-off from a friend at a rural co-operative just down the street from the loan guarantee company where he had his money.

"He told me the other one was going to go out of business and I better go get my money quick," he said.

Qu managed to get his cash, but others behind him in line were not so lucky, he said.

That helps explain why lines formed so quickly once the rumours started circulating this week. Luck has it, he deposited the cash in a bank next door: Sheyang Rural Commercial Bank.

Banks are different than credit co-operatives and guarantee companies in that they are regulated by China's banking watchdog and subject to strict capital requirements.

On Wednesday, officials' painstaking efforts to drive that message home were in full swing.

Bank managers stacked piles of yuan behind teller windows in full sight of customers to try to reassure them that they had plenty of cash on hand. Local officials used leaflets, radio and television to try to calm nerves.

Near one of the troubled banks, a branch of the China Commercial Bank - one of China's 'Big Four' state-owned banks - was running a ticker message on an electronic board over the entrance stating: "Sheyang Rural Commercial Bank is a legal financial organisation approved by the state, just like us".

While small groups of depositors still gathered at several bank branches in and around this part of Yancheng, some arriving by motorbike, others by three-wheeled motor vehicles common in the Chinese countryside, there were signs that the banks' efforts were bearing fruit.

Jin said he did not panic when the rumours were spreading and on Wednesday, like many others, he made a deposit.

Others, like Qu, are holding their nerve. On a visit to see his hospitalised daughter, he decided to nip into a local bank where he still has about 10,000 yuan - just for a look.

"I'm not nervous about my money in the bank. It's protected by national law.

* * *

The same international law that "protected" the Cyprus banking system?

In the meantime, perhaps one should ask: why is it that people everywhere around the globe are so jittery, be it Chinese bank depositors, or E*trade baby high frequency "investors" in US stocks? Is it because everyone sense that fundamentally the system is more broke and insolvent than ever?

* * *

In short, the US has a stock market, which everyone knows is fake and manipulated, but as long as it keeps going higher, it is "safe" to put even more cash into epically overvalued equities. And since everyone is confident they can pull their money before everyone else does, the downswings are sharp and violent (and usually require the Plunge Protection Team to get involved and halt them), and in many ways a complete one-sided panic.

Just like in China. Only in China, instead of being stuck behind their computers, people actually have to go out on the street and withdraw their physical cash before everyone else does.

The problem, of course, is that once the lies and the illusions end, and they will, there will not be enough physical claims to satisfy everyone, be it due to a deposit or equity flight. Because in a fractional reserve system already stretched to the max and leveraged to record levels, one thing is certain: once the upward momentum dies, only devastation and guaranteed 90%+ losses for most, await.

 

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Wed, 03/26/2014 - 12:00 | 4594053 PlusTic
PlusTic's picture

Here, let me start a new one...JPM Chase is insolvent...commence the run!

Wed, 03/26/2014 - 12:29 | 4594168 zaphod
zaphod's picture

This is the beauty of the FIAT system for the bankers, there never ever will be a run because the FED can product dollars on demand, thus satisfying any run before it has a chance to get going and stopping it in its tracks. 

The second the FED takes away this implied guarantee of dollars on demand, any financial institution will crash. Bear Stearns is the perfect example, the FED indicated they would not backstop Bear Stearns which caused an immediate run. However the FED indicated for all the other more favored banks that they would continue to produce dollars on demand. This is why there was a credit run on BS, but all the other banks were fine. 

Wed, 03/26/2014 - 12:39 | 4594183 N2OJoe
N2OJoe's picture

Am I the only one seeing the humor of a fractional reserve bank

"surrounded by rice and rape fields."?

Wed, 03/26/2014 - 13:03 | 4594332 SilverIsKing
SilverIsKing's picture

Rather than give cash, banks in the US will give depositors loaded debit cards.  Problem "solved."

Wed, 03/26/2014 - 12:38 | 4594210 Stackers
Stackers's picture

Where's George Bailey when you need him ?

Wed, 03/26/2014 - 13:07 | 4594348 Herd Redirectio...
Herd Redirection Committee's picture

"Jin said he did not panic when the rumours were spreading and... made a deposit.

Others, like Qu, are holding their nerve. On a visit to see his hospitalised daughter, he decided to nip into a local bank"

Aah, I love the smell of carefully engineered propaganda statements.  The one guy makes a deposit, he's so confident.  The other isn't nervous, no really, but he also makes a stop at the bank!

 

Wed, 03/26/2014 - 13:43 | 4594484 Frank N. Beans
Frank N. Beans's picture

"now now now now now now now now hol hol hold on now, you're money is safe..."

Wed, 03/26/2014 - 14:33 | 4594761 bluskyes
bluskyes's picture

... your money's not here. It's in Jim's house, and Bill's house.

Moe Szylak: Bill, what the hell are you doing with my money in your house?!!! [fight ensues]

Wed, 03/26/2014 - 12:50 | 4594265 Payne
Payne's picture

The US has had a silent Bank Run for 5 years,  all the people 20% of mortgages go unpaid each month.  That is a form of Bank run.

Wed, 03/26/2014 - 13:12 | 4594371 disabledvet
disabledvet's picture

Well, Greece got obliterated for a reason (see below...hope they like Cyrillic) and yes, indeed. "Tis fraud by another name"...just not a very clever one.

"In your facie" in legal parlance.
Got a nice HQ for free tho.

Wonder what the heating bill on that thing is now that propane prices have doubled...in two months.

There was a time when a powerful President warned against such behavior...and that warning was heeded...and there was a time when a multitude of Presidents called it Victory.

Very few winners from that latter Story.

Wed, 03/26/2014 - 12:37 | 4594208 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

JPM Chase is insolvent

Put it in the morgue!

Wed, 03/26/2014 - 13:04 | 4594325 ZH Snob
ZH Snob's picture

He started to notice more people than usual arriving at the Jiangsu Sheyang Rural Commercial Bank next door to his liquor store on Monday afternoon. By evening there were hundreds spilling out into the courtyard in front of the bank in this rural town near a high-tech park surrounded by rice and rape fields.

rape fields?  they have worse problems than bank runs.

Wed, 03/26/2014 - 14:00 | 4594580 SAT 800
SAT 800's picture

Buy that Gold, Bitchaez ! Won non gud.

Wed, 03/26/2014 - 14:03 | 4594586 SAT 800
SAT 800's picture

Buy that Gold, Bitchaez ! Won non gud.

Wed, 03/26/2014 - 11:59 | 4594054 skwid vacuous
skwid vacuous's picture

Sum Ting Wong

Wed, 03/26/2014 - 12:57 | 4594306 _ConanTheLibert...
_ConanTheLibertarian_'s picture

joke's getting old...

Wed, 03/26/2014 - 13:05 | 4594339 SilverIsKing
SilverIsKing's picture

Do you mean that there is Sum Ting Wong by using Sum Ting Wong?

Wed, 03/26/2014 - 12:03 | 4594056 camaro68ss
camaro68ss's picture

keep cram, every-ting O-K

Wed, 03/26/2014 - 12:07 | 4594084 pods
pods's picture

Everything is fine as long as the music is playing.

When it stops, too bad so sad.

pods

Wed, 03/26/2014 - 12:15 | 4594086 ParkAveFlasher
ParkAveFlasher's picture

"Now wait…now risten…now risten to me. I beg of you not to do this thing. If Chou Chu gets hord of this Buirding and Roan, there’rr never be another decent house buirt in this town. He’s arready got charge of the bank. He’s got the bus rine. He got the department stores. And now he’s after us. Why? Werr, it’s very simple. Because we’re cutting in on his business, that’s why. And because he wants to keep you riving in his srums and paying the kind of rent he decides. Wong, you had one of those Chou Chu houses, didn’t you? Werr, have you forgotten? Have you forgotten what he charged you for that broken-down shack? Here, Shang. You know, you remember rast year when things weren’t going so werr, and you courdn’t make your payments? You didn’t rose your house, did you? Do you think Chou Chu would have ret you keep it? Can’t you understand what’s happening here? Don’t you see what’s happening? Chou Chu isn’t serring. Chou Chu’s buying! And why? Because we’re panicking and he’s not. That’s why. He’s picking up some bargains. Now, we can get through this thing arr right. We’ve got to stick together, though. We’ve got to have faith in each other."

- Jo-Ju Bai Ree, It's a Wonderfur Rife

Wed, 03/26/2014 - 12:50 | 4594268 El Diablo Rojo
El Diablo Rojo's picture

I had to log on to up arrow you for making me laugh.  Thanks.

Wed, 03/26/2014 - 12:08 | 4594088 MeMongo
MeMongo's picture

My ultimate strategy is to stay as poor as possible, kind of like I am now. No money for me to withdrawl during a bankrun? No problem, same as it ever was:-)

Wed, 03/26/2014 - 12:08 | 4594090 Al Huxley
Al Huxley's picture

Panic, sure. 1.5 fucking billion people in that country, a couple of hundred bumpkins in the sticks get jumpy and it's a panic.  Sheep are sheep, here, China, India, nobody's panicking, the shepherds have it covered and will save us from the wolves.

Wed, 03/26/2014 - 12:18 | 4594135 fijisailor
fijisailor's picture

It makes great headlines on ZH for generating clicks though lol.  China's still growing by 7 - 8% if you believe their centrally planned statistics.  It's hard to sift out the truth.

Wed, 03/26/2014 - 12:39 | 4594220 walküre
walküre's picture

Exactly. There is no truth in reporting. Their growth numbers were inflated long ago. Anybody can print money to build ghost towns, burn through resources in the process and call it "growth".

Bullshit

Wed, 03/26/2014 - 12:54 | 4594289 Backdraft
Backdraft's picture

"The truth is what I say it is" .... from the movie "Shooter"

http://www.youtube.com/watch?v=vN1EBlXcjyU

 

Wed, 03/26/2014 - 12:48 | 4594260 Gamma735
Gamma735's picture

What do you get for pretending the danger's not real.
Meek and obedient you follow the leader
Down well trodden corridors into the valley of steel.
What a surprise!
A look of terminal shock in your eyes.
Now things are really what they seem.
No, this is no bad dream.

 

-Sheep, Pink Floyd on Animals

Wed, 03/26/2014 - 12:10 | 4594091 FieldingMellish
FieldingMellish's picture

Their first mistake is to put their assets in the control of someone else. Their second mistake was their choice of asset.

Wed, 03/26/2014 - 13:17 | 4594386 disabledvet
disabledvet's picture

Their third mistake was calling a liability an asset...otherwise known as a "reverse repurchase agreement."

THE FED IS WORLDCON!

Wed, 03/26/2014 - 12:09 | 4594092 hugovanderbubble
hugovanderbubble's picture

CHINESE DEFAULT TIC TAC

Wed, 03/26/2014 - 12:11 | 4594108 SubjectivObject
SubjectivObject's picture

A ledger entry is what they have/had in the bank.

Currency is what they carried off.

Contrary to the reportage, money was never seen.

Wed, 03/26/2014 - 12:13 | 4594114 hugovanderbubble
hugovanderbubble's picture

HONG KONG REAL ESTATE NEXT TO COLLAPSE

Wed, 03/26/2014 - 12:40 | 4594226 walküre
walküre's picture

Probably not. That's where the Chinese have buried their money in concrete.

Wed, 03/26/2014 - 12:14 | 4594116 I woke up
I woke up's picture

probably some foreign plant started the rumor

Wed, 03/26/2014 - 12:21 | 4594142 fxrxexexdxoxmx
fxrxexexdxoxmx's picture

CIA Mossad at it again.

Wed, 03/26/2014 - 12:16 | 4594124 ebworthen
ebworthen's picture

"I'm not nervous about my money in the bank. It's protected by national law."

Word to the wise; when SHTF laws go out the window.

Just ask GM bond holders and MF Global customers.

Wed, 03/26/2014 - 12:48 | 4594259 Byte Me
Byte Me's picture

Ask a random Cypriot.

Wed, 03/26/2014 - 12:34 | 4594193 jaxville
jaxville's picture

 I wonder why the Red Chinese embraced frational reserve banking. They are always portrayed as having a longer term outlook on things yet nothing could be more short term expedient than credit based money. China can buy all the gold they want and it will help smooth things out somewhat when the fractional reserve banking/credit based money scheme hits the wall. All the gold in the world will not save Red China from the economic collapse they will one day face.

Wed, 03/26/2014 - 12:37 | 4594206 jughead
jughead's picture

I went to Chase Bank this morning to withdraw $1000 and was told that they were not allowing withdrawls today.  When I asked why, the teller whispered "don't tell anyone, but the FDIC is shutting us down...but don't worry, you can file a claim with the government for any funds you have in here up to $250,000 and I am sure they will reimburse you sooner or later."

wonder what would happen if that little ditty got passed around via social media.

Wed, 03/26/2014 - 12:42 | 4594232 walküre
walküre's picture

and your debts go up in flames just the same.... no money, no debt service

Wed, 03/26/2014 - 12:44 | 4594239 AmericasCicero
AmericasCicero's picture

Im sure the phrase "financial terrorism" would be thrown around...

 

-AC

Wed, 03/26/2014 - 13:19 | 4594393 disabledvet
disabledvet's picture

Warren Buffet calls them "financial weapons of mass destruction."

And "they don't call it the START treaty" for nothing.

Wed, 03/26/2014 - 14:32 | 4594737 Schmuck Raker
Schmuck Raker's picture

I dare you!

Wed, 03/26/2014 - 14:30 | 4594724 Schmuck Raker
Schmuck Raker's picture

So, in China you can withdraw someone else's money, with just their ID??!!

"He was uncomfortable. It was late and he couldn't wait, so he left me his ID card to withdraw his cash," Jin said.

Good thing fraud and theft are nonexistent in China.

Wed, 03/26/2014 - 15:36 | 4595135 Paracelsus
Paracelsus's picture

The Lehman collapse wiped out the retirement savings of many workers in Hong Kong and elsewhere.

The important thing is they were sold on the idea that it was a secure and low risk investment.

Once again the round-eye shafts the chinaman.

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