* Run on rural bank in Sheyang county began Monday on solvency fears
* Residents already rattled by rural co-op bankruptcies, fraud schemes
* Officials appealing for calm, reassuring depositors
* Banks usually considered implicitly guaranteed, insolvencies extremely rare
* Regulators planning to deposit insurance in near future (Updates with background, local resident comment)
By John Ruwitch
YANCHENG, China, March 26 (Reuters) - Rural banks in China's eastern city of Yancheng stacked piles of cash in plain view behind teller windows to calm depositors queueing at bank branches for a third straight day on Wednesday following rumours that they had run out of cash.
According to residents of Sheyang county, which includes Yancheng, panic began on Monday with a rumour that a branch of one local bank turned down a customer's request for a 200,000 yuan withdrawal. Banks declined to comment and Reuters was unable to verify the rumour.
The affected institutions are tiny compared with the scale of China's financial sector, and the rush for cash appears to be an isolated incident so far. Rumours also found especially fertile ground there after a failure of less-regulated three rural credit co-operatives last January.
Yet the news caught nationwide attention, reflecting growing public anxiety as regulators signal greater tolerance for credit defaults.
Miao Dongmei, who runs a baby supply store opposite the branch of the Jiangsu Sheyang Rural Commercial Bank first targeted by depositors said she kept money at the bank, but did not join the stampede.
However, she said she had seen other customers carrying baskets full of cash out of the bank branch, while armoured cars kept pulling up to deliver fresh loads of currency.
Sheyang bank employees told Reuters that some branches had been open 24 hours over the past two days.
A visit to one branch showed tellers had stacked bricks of yuan notes immediately behind the glass, piled above head level, and assembled cash piles the size and height of a double bed in the back to show there was enough to go around.
SPREADING SENSE OF CRISIS
Despite repeated appeals from local officials for calm, by Tuesday the run had extended to another local bank, the Rural Commercial Bank of Huanghai, residents said.
Earlier on Wednesday police and security guards stood by as dozens formed a long line outside while an electronic billboard urged depositors not to be worried by rumours.
The governor of Sheyang county posted a video on the county government's website on Wednesday, urging depositors not to panic.
"Please be assured that the People's Bank of China and the rural commercial bank system will ensure the interests of all depositors will be protected," Tian Weiyou said in the two-minute video statement.
"The county's rural commercial banks will ensure that there will be enough funds for depositors to withdraw at any given time."
Staff at the Sheyang bank were also handing out copies of a statement dated March 24, endorsed by the local branches of the central bank and the China Banking Regulatory Commission, as well as the Zhejiang Sheyang Rural Commercial Bank.
"The Sheyang bank has total deposits of 12 billion yuan ($1.93 billion), the most in Sheyang county; its capital position is very strong," said the statement.
Huanghai and Jiangsu Sheyang banks declined to comment. An official at Jiangsu Sheyang referred media inquiries to Yancheng city's propaganda department.
While insignificant for the wider economy, bank runs in Sheyang highlight the risk of crises in the sprawling, less regulated and opaque shadow banking sector, spilling over to the rest of the financial industry.
Beijing intends to allow market forces to play a greater role in the economy to cut the wasteful investment that fuelled the country's breakneck expansion for the past three decades and so help produce more sustainable and longer-term growth.
The bank runs also highlight the need for regulators to move quickly with a deposit insurance scheme to prevent isolated incidents from undermining confidence in the system as a whole.
In Sheyang, residents, many of them elderly, who had lost money in the collapse of rural credit co-operatives, were some of the first in line to withdraw cash from banks once the bank run started.
"It's all pretty much elderly people who are taking part in the bank run," Miao said.
"Like our grandparents generation, they don't have much money after a lifetime's worth of hard work and they don't want to be tricked again." ($1=6.2024 yuan) (Additional reporting by Adam Jourdan, Samuel Shen, Natalie Thomas, Chen Yixin, Gabriel Wildau, and Lu Jianxin in SHANGHAI; Writing by Pete Sweeney and Fayen Wong; Editing by Mark Bendeich and Tomasz Janowski)