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In China, the banking scandal is causing some to lose faith in the Communist Party

JUANA SUMMERS, HOST:

Depositors in central China have been desperate to get their money out of a handful of small rural banks that are apparently insolvent. When they tried last month, authorities changed the health codes, preventing travel. Last week, they staged a protest where they were attacked by a group of men in mostly white shirts. NPR's John Ruwitch reports.

JOHN RUWITCH, BYLINE: Feng Tianyu and her father traveled about 1,200 miles to try to recover their money. Between them, they had deposited more than $160,000 in New Oriental Country Bank of Kaifeng. It's a tiny rural lender in central Henan Province. The money's been unavailable since April. They were there when the group was attacked.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED PERSON: (Speaking Mandarin).

FENG TIANYU: (Through interpreter) Around four to six white-shirted men came at me, dragging my hair, holding me down. There were also men behind me pushing me forward.

RUWITCH: Feng said they did not let up.

FENG: (Through interpreter) I said, I'm pregnant. I don't want to be pulled and dragged. I can walk by myself.

RUWITCH: She and others were forced onto a bus where police were waiting. She wanted to call an ambulance because she had belly pain, but police confiscated her phone.

FENG: (Through interpreter) So I asked them, what if I have a miscarriage? They replied, the Communist Party will take responsibility for that.

RUWITCH: China's ruling Communist Party has a lot to take responsibility for, and perhaps nothing is more pressing these days than the economy. It's having one of its worst years in decades. In large part that's due to the government's strict COVID prevention measures. But the authorities are also juggling longer-term risks that have built up through years of growth-at-all-costs economic development. The scandal in Henan is unfolding in an under-regulated corner of China's expansive and debt-laden banking system.

MICHAEL PETTIS: The purpose of the rural banks was to support the rural community.

RUWITCH: Michael Pettis is a professor at Peking University's Guanghua School of Management.

PETTIS: The problem is that small banks tend not to be diversified. They tend to be highly concentrated in certain industries and in certain regions. And as a result, if those industries do badly or those regions do badly, then that can destroy the bank.

RUWITCH: Details of what triggered the crisis are still being investigated. The banks drew deposits from far and wide though through third-party apps. And China's banking regulator says a, quote, "criminal group" led by one of the bank owners may have illegally raised and transferred funds. Pettis says that would not be unusual.

PETTIS: In many cases, we've seen individuals take control of banks in ways that are not transparent, very often illegally. And then they use those banks to lend to themselves, which is illegal.

RUWITCH: When those investments go south, he says, it puts the banks at risk. As for these kinds of small rural banks, China actually has a lot of them. But they represent just a sliver of the country's banking activity. The risk of contagion is small. But any banking scandal invites an even bigger risk - social stability, particularly sensitive ahead of a key Communist Party Congress this fall. The authorities have said they'll eventually unfreeze the funds and start handing it back in small sums, but damage has been done.

YE: (Through interpreter) I used to really love my country. Now, though, I don't know what to teach my children. What do I say?

RUWITCH: That's a man surnamed Ye, who was also roughed up the protest. He didn't want his full name used because he's afraid it could hurt his chances of ever seeing his money again.

YE: (Through interpreter) This year, with the pandemic, the economy's gone down, and there are no jobs on the market. I'd been living on my savings this year. But now, even my savings are gone.

RUWITCH: Feng Tianyu, the pregnant woman, is herself a party member. But she says with her money gone, she can't even pay annual dues.

FENG: (Speaking Mandarin).

RUWITCH: She says 30 years of faith in the party seems to have evaporated during just the past few months. John Ruwitch, NPR News, Shanghai. Transcript provided by NPR, Copyright NPR.

John Ruwitch is a correspondent with NPR's international desk. He covers Chinese affairs.