BEIJING (BLOOMBERG) - China vowed to step up supervision of the nation's smaller banks and crack down on illegal activities after investors potentially lost billions of dollars in a suspected financial scam in Henan province.

The China Banking and Insurance Regulatory Commission will strengthen its oversight of shareholders at small- and medium-sized banks and restrain the behaviour of major owners, Xiao Yuanqi, a vice chairman at the regulator, said at a briefing in Beijing on Thursday (June 23). The move is part of measures to beef up corporate governance at the lenders, he said.

The pledge is the latest twist in a scandal involving lenders in Henan province with people claiming they have been denied access to their money and local officials changing pandemic health codes to prevent them from gathering to protest. The misuse of something commonly used to track potential Covid-19 infections has drawn widespread condemnation, even from state media.

Earlier in the week, authorities in Zhengzhou, the capital of Henan, punished five officials for changing the health codes of more than 1,300 customers of the local banks to red, barring them from entering public places or taking public transport. Feng Xianbin, vice chief of the local political and legal affairs commission, was removed from his post, while Zhang Linlin, another official at the commission, was demoted. They were not authorised to switch the codes, according to the city's anti-graft agency.

The local banks were allegedly used by an investment firm to illicitly attract tens of billions of yuan in funds. Local police have arrested suspects tied to a common shareholder in the financial institutions and seized some assets amid protests by investors who bought the savings products issued by the banks.

The banking regulator is working with local authorities on...