What a Financial Cleanup in China Looks Like: Seizures and Bank Runs

“In the past few years, some banks have expanded blindly,” said Yi Gang, the governor of the People’s Bank of China, China’s central bank, in September.

Many of them also played tricks with their accounting, said Xiaoxi Zhang, who scours the financial statements of hundreds of small banks across China for Gavekal Dragonomics, an economic consulting firm. Many repackaged their loans as investments, skipped key financial disclosures and lent money to too many risky borrowers.

Then, two years ago, a new top banking regulator named Guo Shuqing pledged to rein in reckless lending by banks and other financial institutions.

Soon online lenders that once offered eye-watering returns were put out of business, companies began to default on their bonds and banks were told to stop hiding bad loans. In the process, a number of smaller Chinese banks were shown to be less than healthy.

In May, Chinese regulators seized a bank for the first time in two decades. Baoshang Bank, a little known bank in northern China, was put into receivership. The bank was once part of a sprawling network of investments controlled by Xiao Jianhua, a tycoon who was ensnared in an anticorruption campaign. Baoshang made several large loans to other companies within Mr. Xiao’s financial empire that were never paid back. Still, it remained open for depositors.

Then two months later, China’s biggest bank, the state-controlled Industrial & Commercial Bank of China, and two investment firms pumped money into another embattled lender, Bank of Jinzhou. The bank gave out loans to two of its biggest shareholders, the carmaker Hawtai Motor Group and Baota Petrochemical Group, which also had financial difficulties.

Weeks later, a unit of China’s sovereign wealth fund injected cash into Hengfeng Bank, a bank based in the coastal city of Yantai. Two of Hengfeng Bank’s former chairmen are now under investigation for corruption.