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2 SPEAKING
FREELY Governance still weak at China's
state banks By Mark A DeWeaver
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
The China Banking
Regulatory Commission has expressed renewed
concern about the use of bank credit for
stock-market speculation.
In a circular
(No 97, 2006) dated last December 29, the CBRC
required the banks to
withdraw loans used to finance stock trades, while
a subsequent notification warned of risks from the
use of fraudulent mortgages by property
speculators. The same issues were raised again
this month in a proposal by the Chinese People's
Political Consultative Conference, the country's
top political advisory body to the communist
leadership. The CPPCC called for strict controls
to prevent collusion among bankers and developers,
as well as policies to control the flow of bank
funds into the stock market.
The CBRC's No
97 circular, titled "Notification Regarding the
Management of Risks Relating to the Interaction of
Bank Sector Financial Institutions and Securities
Companies", has been blamed for two major
stock-market corrections so far this year (in the
last weeks of January and of February) and the
possibility of a crackdown on illicit financing
continues to weigh on the asset markets. But in
addition to signaling possible regulatory action,
the CBRC and the CPPCC are also telling us
something about the state-owned banks: the promise
of better operational risk management after their
Hong Kong listings has not been realized.
Perfunctory due
diligence Details of the CBRC's
notification on mortgage lending (though not the
notification itself) were made public in February.
The regulator revealed that an investigation in
the second half of last year found fraudulent
mortgages totaling "billions" of yuan. At one
state-owned bank (presumably the worst offender),
1.309 billion yuan (US$168 million) in such loans
were discovered; a further 734 million yuan ($94
million) turned up at another. These amounts were
6.05% and 3.23%, respectively, of the personal
housing credit examined at each lender.
Fraudulent mortgages have typically been
used by developers to finance property projects.
In one version of the scam, the developer sells
units to its own investors or entities it controls
(in effect to itself), with the "buyer" using a
mortgage loan to pay the "seller". The resulting
phony transactions, often done at above market
prices, make it appear that a project is selling
well but the bank will only be repaid if real
sales can subsequently be made. Alternatively,
multiple mortgages may be taken out on the same
property or the property may not even exist at
all.
The CBRC found that such lending is
the result of "perfunctory due diligence
investigations", with the banks merely "going
through the motions" of examining loan
applications without doing enough to detect
irregularities. Other observers, including the
CPPCC, have gone further, suggesting active
collusion among developers and bank staff - the
former desperate for funds, the latter, especially
those preparing to go public, eager to expand
their lending.
Stock speculators have also
benefited from the banks' lax due-diligence
standards. In addition to mortgages, funds from a
variety of personal-consumption loans - some with
collateral, some without - have ended up in the
market.
For the powerful and
well-connected, borrowing from a bank can be a
surprisingly easy way to get cash. An article in
the January 31 edition of the 21st Century
Business Herald described one bank branch where
consumption loans were routinely given out to
"VIP" customers with few questions asked. For
government officials, credit limits were typically
based simply on rank - 800,000 yuan for officials
at the prefecture level, 400,000 for those at the
county level, and 200,000-300,000 for those at
lower levels.
Naturally the branch's
employees also had little trouble taking out
consumption loans for themselves. While new hires
might require some collateral, those who had been
at the bank for several years could easily borrow
"hundreds of thousands" of yuan with few
conditions for just about any purpose they cared
to put down on the application form.
The
CBRC's No 97 circular "strictly prohibits"
"misappropriation" of bank credit "either directly
or indirectly" for stock trades and calls for the
"prompt" recall of any such loans. This may be
more easily said than done. Only in cases where
the borrower was careless enough to transfer
borrowed funds directly to a brokerage account
will showing that the money went into the market
be straightforward.
Widespread
collusion Over the past year and a half,
three of China's Big Four state-owned banks have
listed in Hong Kong - China Construction Bank
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