Hundreds rush to rural lender after rumors about solvency

Hundreds of people rushed to withdraw money from a branch of a small Chinese bank on Monday and Tuesday after rumors spread about its solvency, reflecting growing anxiety among investors as regulators signal greater tolerance for credit defaults.

The case highlights the urgency of plans to implement a deposit insurance system to protect investors' deposits in case of bank insolvency, given that Chinese are growing increasingly nervous about the impact that slowing economic growth will have on the viability of financial institutions.

Regulators have said they will roll out deposit insurance as soon as possible, without giving a firm deadline.

Domestic media reported, and a local official confirmed, that ordinary depositors swarmed a branch of -Jiangsu Sheyang Rural Commercial Bank in Yancheng in East China's -Jiangsu Province.

Bank Chairman Zang Zhengzhi was quoted as saying the bank would ensure payments to all the depositors.

The report did not say how the rumor originated.

Why Yancheng investors suddenly lost confidence in the security of their bank deposits is not clear, considering that the Sheyang bank is subject to formal reserve requirements, loan-to-deposit ratios and other rules to ensure they keep sufficient cash on hand to meet demand.

Bank failures in China are virtually unknown, as banks are considered to operate under an implicit guarantee from the government.

Finally, the central bank has eased up on money rates since February, and traders say liquidity in the interbank market - where banks like Sheyang bank can tap short-term funds to meet depositor demand - remains relatively relaxed.

"It's true that these rumors exist, but actually [the bank going bankrupt] is impossible," said Zhang -Cha--oyang, an official at the publicity department of the Communist Party committee in Tinghu district, where the bank branch is located.

"It's a completely different situation from the problem with the cooperatives," he noted.

Zhang was referring to an incident that rattled depositors in Yancheng in January, when some local rural cooperatives - which are not subject to the supervision of the bank regulator - ran out of cash and locked their doors.

Local officials say several bosses of cooperatives fled after committing fraud.

China's central bank governor said earlier this month that deposit rates are likely to liberalized in one to two years - the most explicit timeframe to date for what would be the final step in freeing up banks to set their own interest rates.

It is widely expected to introduce a deposit insurance scheme before liberalizing deposit rates to protect savers in case a freed-up market leads to major strains on smaller banks and alarms the public. Analysts also expect the controls on deposit rates to be lifted gradually.