Chinese authorities will start refunding bank customers, whose accounts have been frozen for months, following some of the biggest protests the country has seen since the start of the pandemic.

Customers from four rural banks in the central province of Henan, and one in neighboring Anhui province, will be repaid by authorities starting Friday, according to statements late Monday by the provincial financial regulators.

The first payments will be sent to customers with a combined amount of less than 50,000 yuan ($7,445) on deposit at a single bank, they said. Separate arrangements will be announced in due course for customers with more than that in their accounts, the authorities added.

The rural banks have still not offered a clear explanation as to why and for how long the funds will remain frozen. In May, the national banking regulator said that a major shareholder of the Henan banks was responsible for having illegally attracted money from savers via online channels.

The repayments will be handled by two other banks, but the regulators didn't say where the funds would come from.

The announcements come after a mass demonstration on Sunday in Zhengzhou city, Henan province, which was crushed violently by authorities. It was the largest protest yet by the depositors, who have been fighting for months to retrieve their frozen savings.

A 45-year-old entrepreneur from Wenzhou in eastern Zhejiang province told CNN Business last month that he has been unable to access a penny of his family's life savings of $6 million.

Runs on small Chinese banks have become more frequent in recent years and some have been accused of financial improprieties or corruption. But experts worry that a much bigger financial problem could be looming, caused by fallout from a real estate crash and soaring bad debts related to the Covid-19 pandemic.

As many as 400,000 customers across China were unable to access their savings at the rural banks in Henan and Anhui provinces, according to an estimate in April by Sanlian Lifeweek, a state-owned magazine.

That's a drop in the ocean of China's vast banking system, but about a quarter of the industry's total assets are held by around 4,000 small lenders, which often have opaque ownership and governance structures and are more vulnerable to corruption and the sharp economic slowdown.

Police in Henan said Sunday that they had arrested a number of suspects, accusing them of using the rural banks to illegally solicit public funds since 2011.

Despite the police action, and the move to repay some depositors in the coming days, analysts warn that the crisis may not be over yet.

“The situation is still evolving,” said Betty Wang, senior China economist at ANZ, in a note to clients on Tuesday.

“Despite the small size of the assets involved, the social impact of the incident could be significant if it is not handled appropriately. It could also trigger another round of regulatory tightening,” she said, adding that Beijing could launch a fresh round of investigations into the online banking sector, village banks, or “potential local corruption.”

Not everyone will be helped

Monday's statements are the first promise by Chinese authorities that they would pay back the frozen funds.

However, many customers have much more than 50,000 yuan stuck in those banks, Wang said, and they remain in the dark about the future of their life savings.

The plan also has other exclusions.

No payments will be made to customers who deposited funds with the banks via "other channels with high interest rates” or who violated laws and regulations, the authorities said. But they didn't elaborate, leaving the grievances of many victims apparently unaddressed.

In the Henan and Anhui cases, Chinese state-run media have reported that the savings products were pitched to customers via online platforms affiliated with, or owned by, giants of China's tech scene such as Baidu (BIDU) and JD.com. (JD)

In China, local banks are only permitted to obtain deposits from their home customer base, but it has become common in recent years for many small banks to partner with online platforms and attract funds across the country.

In early 2021, Beijing banned banks from selling deposit products via online platforms, fearing that the rapid expansion of the fintech sector could increase risks in the wider financial system.

But the savers that CNN has talked to say that they were told by the banks that the deposit products were legal, and that they were protected by the deposit insurance scheme.

“If the incident is determined to be financial fraud or if the affected accounts are not strictly saving deposits, then they may not be under the protection of the deposit insurance scheme,” Wang said.

In China, deposits up to 500,000 yuan (almost $75,000) are guaranteed in the event of bank failures, but if the government's investigation finds that these cases involved “non-compliant” transactions, people could lose everything.

The social discontent arising from the incident could be a significant problem forthe government.

The most impacted are farmers with low incomes who had deposited nearly all their life savings, Wang said.

“They view banks as the safest place backed by sovereign creditworthiness. Inappropriate handling of the issue could result in social unease and threaten stability,” Wang said.

“This can be particularly sensitive in the aftermath of local lockdowns and ahead of the 20th Party Congress,” she added. (CNN)

•PHOTO: Over 3,000 Chinese demonstrators hold banners during a rare mass protest over the freezing of deposits by rural-based banks, outside a People's Bank of China building in Zhengzhou, Henan province, China July 10, 2022.

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