Failed wealth fund raises mainland alarm over banks

Collapse of product sold by Huaxia Bank branch exposes lax management and supervision of outlets on the mainland

PUBLISHED : Friday, 04 January, 2013, 12:00am
UPDATED : Friday, 04 January, 2013, 2:48am

Those who complain of an overregulated banking system on the mainland and heavy-handed intervention by the government in lenders' business operations were recently given reason to rethink their conclusions.

The default of a wealth management product issued by a branch of Huaxia Bank in Shanghai's Jiading district exposed the lax management and supervision of banking outlets.

Industry consultants estimate an aggregate 12 trillion yuan (HK$14.9 trillion) has poured into wealth management products sold by mainland banks, as depositors salivated over the higher yields offered by the risky products.

But few depositors, with their long-held confidence in state-owned banks, bother to find out how their money will be used.

Bank of China chairman Xiao Gang has warned about the rapid growth of the wealth management sector, which he described as a Ponzi scheme, calling for better policing of the thousands of banking outlets across the country.

"The Huaxia scandal is not just about the regulation of wealth management products," an official with the Shanghai branch of the China Banking Regulatory Commission said. "More importantly, it has prompted the regulator to assess the severity of the problem facing the banking outlets.

"Chiefs of banking outlets have been given too much power, which could cause a liquidity crisis in future, when more defaults occur."

In the case of the failed product sold at the Huaxia branch, a manager, Pu Tingting, is being investigated by police for suspected economic crimes. He was alleged by the bank to be illegally raising funds for Zhongding Wealth Investment Centre.

"We don't believe that Pu alone should be held responsible," an investor said.

"We deposited money at Huaxia Bank, and the bank told us our money was lost. It's not acceptable."

Wei Chenyang, Zhongding's boss, was taken into custody as police investigated how the product collapsed and where the money went.

Three buyers of the product said they were convinced by Pu that the branch's chief manager had also bought the product that had offered an annualised return of 11 per cent.

"I was shown the documents that proved the chief manager's purchase of the product," said Zhou Guowu, an investor in the Zhongding product. "It cemented my belief that the product was worth investing in."

Huaxia admitted that the Zhongding product was not officially registered with the bank's headquarters.

Wang Feng, a spokesman for the Beijing-based bank - which is partly owned by Deutsche Bank - told the South China Morning Post it was still awaiting the result of the investigations into Pu and instructions from the regulator before making a decision on how to compensate the victims.

On the mainland, a wealth management product cannot be issued unless it receives approval from the banking regulator.

Banks co-ordinate with trust firms or other institutions to sell wealth management products, with the banks acting as the middlemen that raise the funds for the borrowers.

"Bold chiefs of banking outlets could take advantage of depositors' trust by raising funds for borrowers without the approval of the headquarters or the regulator," the CBRC official said.

"They are kings who have the clout to allocate tonnes of money to entities and individuals who need it. In return, they get fat on grey income, as the borrowers pay them kickbacks."

Fitch Ratings estimated that 100 wealth management products were sold on the mainland each day in the third quarter of last year.

It is believed that billions of yuan of the high-risk products will eventually evaporate as more defaults take place.

The CBRC has issued a notice to banks requiring them to conduct a thorough check on wealth management products issued by their branches and outlets.

But analysts said it might be too late to tighten regulation and supervision of wealth management products now that the size of the market was expected to exceed 13 trillion yuan by the end of last year, equivalent to 16 per cent of deposits at commercial banks, according to Fitch.

The CBRC has a tight grip on lenders' business operations and still uses administrative measures to control the pace of loan approvals.

Such moves, which are in part a means to support Beijing's macroeconomic policies, have been criticised for hampering the healthy growth of lenders.

The banking regulator now finds itself between a rock and a hard place in the face of the increasing risk of wealth management products failing.

"To a certain extent, the regulator has to find a way to better regulate banking outlets," said the official.

"The regulator and banks' head offices don't seem to know what the outlets are doing.

"Wealth management products are an example of how the outlets have gone out of control.

"A banking outlet can be run as a financial institution during the day and a barber's shop at night if it is not properly policed.

"Still, people trust the banks and will buy whatever products and services their outlets sell."