China Construction Bank, the world's second-largest lender by market value, will suffer losses from the three billion yuan (HK$3.69 billion) owed to it by a private company in Zhejiang that has filed for bankruptcy, a top bank executive said.
Of the debts owed by conglomerate Zhejiang Zhongjiang Group, 98 per cent was guaranteed or backed by collateral, and 1.6 billion yuan was in loans, CCB vice-president Zhu Hongbo told the official Financial News on Tuesday.
Shares in CCB fell 7.18 per cent in Hong Kong last week and 3.12 per cent in Shanghai after the New Century reported on June 9 the bank was the biggest lender to Zhongjiang, which was hit hard by last year's government crackdown on property market speculation. CCB lost 0.25 per cent in Shanghai and 0.62 per cent in Hong Kong yesterday.
'The core companies of the Zhongjiang group are still under normal operation, and our interests are mainly in these companies,' Zhu said. 'Of course we will bear some losses. We booked some provisions last year.'
Xinhua reported last month that the Zhejiang police had arrested Yu Zhongjiang, the owner of the company, on suspicion that he had illegally collected public funds. The company has businesses in investment, property and chemicals.
The CCB executive said there were flaws in risk warning and control systems in some grass-roots branches. However, 'generally speaking, our internal risk control is effective', the executive said.
Internal controls at mainland banks are in the spotlight after Yang Kun, an executive vice-president of the Agricultural Bank of China, was detained in Beijing in May on allegations of illegal gambling and misappropriation of clients' money.
And in yet another embarrassing scandal involving the mainland's banking system, Tao Liming, president of the Postal Savings Bank of China, was taken into custody last month on suspicion of having committed economic crimes.
Guo Tianyong, a professor at the Central University of Finance and Economics, said investors were now giving lower valuations to mainland banks amid concerns about their deteriorating asset quality.
'Under the tightening measures to cool the real estate market, once developers' capital chain was broken because of falling prices and sluggish sales, banks were exposed to the risk of rising bad loans,' Guo said.
Outstanding non-performing loans of mainland banks rose 2.4 per cent over the first quarter of this year to 438.2 billion yuan at the end of March, according to the China Banking Regulatory Commission.
CCB's Zhu said the current economic slowdown as well as illegal fund-raising were challenges for commercial banks. Zhejiang companies often borrow from individuals, private companies or other players in the underground banking system by promising higher interest rates than banks. The increased leverage exposes the companies to bigger risks. Once banks lend to such companies, they are also embracing the risks. In Wenzhou, banks' outstanding non-performing loans grew by 9.45 billion yuan to 18.14 billion yuan from the first half, with the NPL ratio up from 1.33 to 2.69 per cent at the end of June.