China arrests hundreds in country's biggest bank fraud investigation

(Bloomberg) — China arrested hundreds of people allegedly involved in the country’s biggest-ever bank fraud and began paying more victims of the $5.8 billion scandal in an effort to maintain social stability ahead of this year’s a congress of the Communist Party held twice a decade.

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Police in the city of Xuchang in Henan province arrested 234 suspects in connection with the scam and made “significant progress” in recovering the stolen money, according to a statement late Monday. Police said a criminal gang led by suspect Lv Yi illegally controlled four village lenders, including Yuzhou Xinminsheng Village Bank, offering interest rates of up to 18 percent to attract funds that officials said amounted to 40 billion yuan (5.8 billion dollars).

Local authorities said they were paying more victims in addition to the 18 billion yuan provided as of mid-August. Investors with deposits of 400,000 yuan to 500,000 yuan will be paid from early Tuesday, authorities said. Those who have lost more will receive an initial sum of 500,000 yuan, with the balance reserved for now.

Hundreds of protesters took to the streets in Henan earlier this year after they were denied access to their deposits and investments by rural banks. The fraud dealt the biggest blow to confidence in China’s $52 trillion banking system since 2019, when the government took control of a lender in Inner Mongolia.

The Communist Party is gearing up for its 20th congress later this year, where President Xi Jinping is expected to secure an unprecedented third term. Social stability ahead of the meeting is being prioritized as slowing economic growth, the Covid lockdown and a rumbling property crisis create hardship for broad swaths of the population. At a meeting of the Politburo at the end of July, regulators were urged to maintain stability in financial markets and to take serious measures against financial crimes.

Although rural banks are not allowed to seek deposits outside their local area, the lenders involved in the scam are selling their deposits online through third-party platforms, making it a national problem.

China has been trying for years to root out problems in its troubled rural banking system, a network of about 3,800 lenders that hold the lowest available capital against risky assets among rivals. Beijing has raised 64.6 billion yuan in the first tranche for a stability fund to rescue troubled financial institutions.

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