Bloomberg
Huarong Debacle highlights problems at hundreds of Chinese banks
(Bloomberg) – Lai Xiaomin, former chairman of China Huarong Asset Management Co., has been convicted of accepting $ 277 million in bribes, as well as bigamy, crimes that were serious enough to be seen summarily executed in January. consequences – are rare in any country. But in China, more modest but still blatant mismanagement is common in the $ 54 trillion financial industry. In 2020 alone, the country’s leading banking regulator issued nearly 3,200 violations against institutions and 4,554 against individuals, ranging from senior executives to ordinary people; it imposed fines totaling 2.3 billion yuan ($ 352.2 million). In the US, which has a much longer history of banking regulation, the Federal Reserve has undertaken a total of 58 enforcement actions. Among the violations, Chinese investigators found that fabricated financial statements, nannies and executives of managers were installed as controlling shareholders, and favorable rates and beloved traders for investors and family members. The state has also rescued three weak money lenders and amassed dozens more since its first repression three years ago. Of the 4400 financial institutions, 12.4% are still designated by the central bank with a high risk of failure. Now the government is rewriting the commercial banking legislation and will have a “zero tolerance” for transgressions. “Poor governance is, of course, a risk to financial stability,” says Alicia Garcia Herrero, chief economist at Natixis SA. If contained within the smallest institutions in the country, the potential for damage is minimal, she added. “The issue is that we do not really know whether government problems are really limited, and that this is the big risk.” image of the cost of mismanagement and uncontrolled corruption. Huarong, with about $ 42 billion in outstanding debt at home and abroad, delayed its earnings report in early April and began a spiral in which the effects fell to a record low of about 52 cents on the dollar. Its shares have declined by 67% since its debut in 2015 and are currently suspended. business transformation and governance reform, and improved corporate governance to move towards stable and better development. This is the second time in two years that creditors have been left at the mercy of bad actors. In 2019, China shocked world markets with a surprise seizure of Baoshang Bank Co., once seen as a model for financing regional economies. The takeover and eventual bankruptcy of Baoshang, caused by the misappropriation of funds by its controlling shareholder, also called into question the long-held assumptions of a perpetual ceasefire. Overall, the China Banking and Insurance Regulatory Commission blamed problems in the financial system on bank directors, shareholders and executives, saying in a December statement that “inefficient corporate governance is the main cause.” to the CBIRC, which does not name the bank. Most of these loans are defaulted or non-performing. The largest shareholder in one bank increased revenue by 80 million yuan to make the institution look profitable. Elsewhere, one person and 22 of what the regulator described as its “shadow subsidiaries” have interests in 17 banks, exceeding the limits of bank ownership. The regulator also identified bad behavior in its own ranks and put the official in charge of supervision. of the rural banks being investigated for serious disciplinary and law violations. Social media also allowed employees to air grievances and reports of misconduct. Earlier this year, a whistleblower at China Life Insurance Co. on the social network Sina Weibo claims that the branch chief produced customer signatures and pocketed millions of dollars in non-existent marketing costs. Following a CBIRC investigation, the company said in a statement that it was fined 510,000 yuan for inadequate internal controls and promised to improve compliance with education. In response to the rising risks, the central bank is reviewing its commercial banking law. The proposed changes include a new chapter on corporate governance, specifying for the first time the responsibilities of shareholders and the key role of the board. It also prohibits entities from using borrowed money to invest in banks, and prohibits directors from holding positions in more than one affiliated institution. Unlike in the US and Europe, where misconduct and mismanagement often lead to public outcry, regulatory investigations and even sensational dismissals. , top leaders have so far been isolated in China. Senior executives are rarely held accountable for branch-level violations, and the financial penalties pale in comparison to the 1.9 billion yuan profit the industry earned last year. “This is work in progress,” said James Stent, author of China’s Banking Transformation and a former banker who has spent more than a decade on the boards of two Chinese lenders. ‘Management is generally good at large preferred banks, but problems remain at lower level financial institutions. It will take time to address it, and management will always be imperfect. Visit us for more and more articles like this on Bloomberg.com. Sign up now to stay ahead with the most trusted business resource. © 2021 Bloomberg LP