Huarong Debacle Highlights Woes of Hundreds of Chinese Banks, Banking News & Top Stories
BEIJING (BLOOMBERG) – Lai Xiaomin, former chairman of China Huarong Asset Management Co, was found guilty of accepting $ 277 million (S $ 369.7 million) in bribes, as well as bigamy, crimes serious enough to see him summarily executed in January.
Such extreme behavior – and its consequences – are rare in any country. But in China, more modest but still egregious mismanagement is common in the $ 54 trillion financial sector.
In 2020 alone, the country’s main banking regulator issued nearly 3,200 breaches against institutions and 4,554 against individuals ranging from senior executives to core staff; he imposed fines totaling 2.3 billion yuan (S $ 470.4 million). In the United States, which has a much longer history of banking regulation, the Federal Reserve has taken 58 enforcement actions in total.
Among the breaches, Chinese investigators found fabricated financial statements, nannies and executive drivers installed as majority shareholders, as well as great rates and privileged deals for investors and their relatives.
The state has also bailed out three small, mismanaged lenders and merged dozens more since its first crackdown three years ago. However, out of 4,400 financial institutions, 12.4% are designated at high risk of bankruptcy by the central bank. Now the government is rewriting the Commercial Banking Act and will have “zero tolerance” for transgressions.
“Poor governance is obviously a risk to financial stability,” said Alicia Garcia Herrero, chief Asia economist at Natixis. If it is contained in the smallest institutions in the country, the potential for damage is minimal, she added. “The problem is, we don’t really know if the governance issues are really contained and that’s the big risk.”
Last week offered a fuller picture of the costs of mismanagement and unchecked corruption. Huarong, which has about $ 42 billion in debt at home and abroad, delayed the release of its results in early April, starting a spiral that saw its bonds drop to a record low of around 52 cents. for a dollar. Its shares have fallen 67% since its inception in 2015 and are currently on hold.
A spokesperson for China Huarong said Thursday (April 15) that the company “learned from the case of Lai Xiaomin, firmly implemented central government policies, continued to eliminate toxic influence, restored our governance enterprise, accelerated business transformation and management reform, 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 rocked global markets with a surprise seizure of Baoshang Bank, once considered a model for financing regional economies. Triggered by embezzlement by its controlling shareholder, Baoshang’s takeover and possible bankruptcy also called into question long-held assumptions of a perpetual government safety net.
In general, the China Banking and Insurance Regulatory Commission (CBIRC) blamed the problems of the financial system on directors, shareholders and executives of banks, saying in a December statement that “ineffective corporate governance is the cause. first “.
In one example, a rural bank loaned the equivalent of 95 percent of its net capital to its shareholders and affiliates, according to the CBIRC, which did not name the bank. Most of these loans have defaulted or are non-performing.
The largest shareholder of a bank inflated its income by 80 million yuan to make the institution appear profitable. Elsewhere, one person and 22 of what the regulator described as its “shadow affiliates” held stakes in 17 banks, far exceeding bank ownership limits.
The regulator has also identified bad behavior in its own ranks, putting its manager in charge of monitoring rural banks under investigation for serious disciplinary and legal violations.
Social media has also allowed employees to voice their grievances and report wrongdoing. Earlier this year, a China Life Insurance Co whistleblower claimed on social media Sina Weibo that the branch manager fabricated client signatures and pocketed millions of dollars in non-existent marketing expenses. Following a CBIRC investigation, the company said in a statement that it was fined 510,000 yuan for inadequate internal controls overall and is committed to improving education at conformity.
Faced with rising risks, the central bank is revising its law on commercial banks. The proposed changes include a new chapter on corporate governance, which for the first time clarifies the responsibilities of shareholders and the key role of the board of directors. 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 the United States and Europe where misconduct and mismanagement often lead to public outcry, regulatory investigations and even high-profile layoffs, top executives have so far been isolated in China. Senior executives are rarely held accountable for branch-level violations, and the financial penalties are paltry compared to the 1.9 trillion yuan in profits the industry made last year.
“It’s a work in progress,” said James Stent, author of China’s Banking Transformation and a former banker who spent more than a decade on the boards of two Chinese lenders. “Governance is generally good in large priority banks, but problems remain in lower level financial institutions. Resolving them will take time and governance will always be imperfect.”