Bank 'milling' scandal bound to be replayed again and again

Deja vu. A decade after some listed state-owned firms told the market that significant bank deposits - the safest of all investments - were in danger, another case has emerged.

On Thursday, Sinotruk (Hong Kong) announced that a 500 million yuan (HK$588 million) bank deposit by one of its subsidiaries was found to be related to a financial note forgery case, and 'certain defective deposit slips' had been located. That was two days after mainland media named the Shandong-based heavy truck maker as one of the victims of the Qilu Bank scandal.

Sinotruk provided no details. Nor will it comment on the reports.

According to Xinhua, in its investigation of Qilu Bank, police have found fake deposit slips. A man allegedly has been using fake slips to get significant loans. Various banks and companies were involved. All Sinotruk would say was that the affected deposit was with a bank that is involved in a financial forgery case and judicial authorities are working on the case.

The exact facts of the Sinotruk case remain to be disclosed. Whatever they may be, the so-called 'milling' practice is an open secret on the mainland. The first thing you need is an agent who, very often, is a former banker, so he is well connected with local banks and corporates, and knows who has cash - and who wants it.

He hooks up the cash-rich corporate and the deposit-hungry banks. The corporate makes a deposit; the agent gets the endorsement to use the deposit slip as collateral; the bank lends him money; he deposits the money with other banks for a bigger loan; and then lends the money to some private entrepreneurs at loan-shark rates (see diagram). The mill can go on and on. Every party has some goodies to gain.