HSBC's high-profile, US$9.4 billion sale of its entire stake in mainland insurance giant Ping An has so far delivered only one thing for China Development Bank chairman Chen Yuan: a lesson that perhaps it is time for his bank to be more transparent following years of fast credit expansions, largely owing to Beijing's support.
In early December, when the deal was first announced, CDB initially agreed to put up more than 60 per cent of the US$9.4 billion that Thailand's Charoen Pokphand (CP) Group needed to purchase HSBC's 15.6 per cent stake in Ping An, the mainland's No2 life insurer.
More recently, the bank has been widely reported to be considering vetoing the loans for CP , signalling that the eye-catching acquisition may be in trouble. The reports raised a host of concerns and questions in the market about the reasons for CDB's shift.
Which decision-makers at CDB initially signed off on the deal? What led the bank to change its mind so rapidly? Did top bosses at CDB, a capital-rich state-owned bank that is directly overseen by the State Council (China's cabinet) know that there was a secretive behind-the-scenes second buyer involved in the deal? And why has CDB - unlike HSBC, the China Insurance Regulatory Commission or CP, which claims to be the only buyer for the Ping An stake - stuck with a policy of absolute silence so far?
People close to the situation told the South China Morning Post that a high-level external source told senior executives including Chen after they agreed in principle to offer loans to CP that the Thai firm might not be the real buyer and ultimate owner of the Ping An stake. Just a few days after HSBC officially announced its plan to sell the stake to CP, which was the only buyer named in legal documents, the source told Chen (who is the son of late top Communist Party leader Chen Yun) that Xiao Jianhua , a financier with a mixed reputation on the mainland, may be involved in the deal, the sources told the Post.
The information was given to Chen about two weeks before the news about Xiao's role in the deal became public in a report by the respected financial magazine Caixin Century Weekly in late December - news that was quickly followed up by other media.
Chen and his associates at the bank have since decided to put the loan offer on hold and triggered an internal investigation.
When asked by the informer if he or his bank were aware of Xiao's involvement in the deal, Chen's reply was a simple "no", the sources said.
If that was indeed the case, it suggests CDB must strengthen its risk control in the loan-approval process. Although the loan for CP was offered via CDB's Hong Kong branch, the decision to offer such a large loan would usually be endorsed or signed off by the top bosses in its Beijing head office.
Xiao, whose whereabouts are a secret, denied through his lawyers that he was involved in the Ping An deal.
CP, one of the first foreign companies that was invited by the Chinese government to invest in the mainland in the late 1970s when the late paramount leader Deng Xiaoping took power, insisted it would spend its own money only in combination with loans to pay for the deal. The fact that both CP and Xiao have denied that the latter has any involvement in the deal also raises questions as to why CDB apparently still intends to withdraw the loan.
CDB has a long relationship with CP and once agreed to extend a 100 billion yuan (HK$123 billion) line of credit for its agriculture-related business in China - another factor that raises questions about CDB's apparent reluctance to go ahead with the latest loan.
Xiao first came under the media spotlight in 2007 when Pacific Securities, part-owned by Tomorrow Holdings, a financial conglomerate founded by Xiao, went public. Financial irregularities were discovered in the listing process and the affair eventually cost a China Securities Regulatory Commission vice-chairman his job.
Xiao escaped unscathed, but he is thought to have spent most of his time in the United States, Canada and Hong Kong since the scandal. Xiao, who has many connections with the sons and daughters of state leaders, also known as princelings, has never been formally charged with any offence on the mainland.
In early December, HSBC said when it first announced the deal that the Ping An stake sale would be completed in two stages. Firstly, CP would pay for about 20 per cent of the shares with its own cash, while the remainder would be paid for with a combination of cash and loans provided by CDB's branch in Hong Kong.
At this time Xiao became the media focus again, with CDB apparently keen to maintain its distance from Xiao by all means. The bank had already sent a risk warning note to the China Insurance Regulatory Commission late last month, which indicated that it would most likely withdraw from the deal, said the sources.
Last week, HSBC said in a stock filing aimed at clarifying market speculation about the deal that it had nothing more to disclose beyond its first announcement.
Legal experts say that technically speaking, until CDB officially informs CP of its decision not to offer the loan, HSBC is right to say the deal between CP and CDB remains legally valid.
Given CDB's important role in the deal, investors in Ping An stocks, which are listed in both Shanghai and Hong Kong, have been anxiously awaiting a statement from CDB regarding its decision on the loan. Last week, the CIRC said it was seeking more information about the deal, but the regulator did not elaborate on what it wanted to know.
CDB's silence has also raised doubts over how transparent its loan-approval process could be, especially for a deal related to one of the mainland's most important financial assets, which is also a publicly traded heavyweight in the stock market.
Within the industry, CDB has long been considered a role model for Chinese banks and has established a long-term reputation for risk control, thanks to its strict internal processes for loan approval.
"CDB shocked many state-owned enterprise managers and government officials who regarded the bank as a provider of 'free lunches' by rejecting their loan applications," said Erica Downs, a fellow at the John L. Thornton China Centre at the Brookings Institution in her 2011 paper about CDB. The bank was even ranked by Global Finance magazine in its 2012 survey as one of the 50 safest banks in the world. But the case of the Ping An deal is causing industry executives to begin having second thoughts about CDB's corporate governance, transparency and, perhaps, the bank's credibility among its clients.
Some market watchers wonder if CDB expanded too fast in the course of its transformation into a commercial bank at a time when it faced tougher industry competition.
Last year, CDB, which has long been associated more with deals in the natural resources sector, made a surprise move by being a guarantor in the Hong Kong stock exchange's milestone acquisition of the London Metal Exchange.
Also in December last year, the bank agreed to offer 100 billion yuan in loan credit to Hainan Airlines, prompting market speculation that the second-tier carrier could be working with CDB on potential overseas acquisitions.
According to Caixin, the Hong Kong branch of CDB currently has HK$300 billion worth of outstanding loans. If the loan support for CP went ahead, it would represent almost 15 per cent of the total of the bank's outstanding loans at the branch, which opened for business in 2009.
On top of the questions about Xiao's role, market participants are also wondering about the proportion of the deal that is supposed to come from borrowing.
The fact that about 60 per cent of the money for the deal would be funded through loans - and the fact that the whole sum was to come from one single bank - are considered unusual for such a huge deal.
Banking industry insiders say it is more common for no more than 50 per cent of a deal to come from loans or debt issues, with one third of the price a more typical ratio, and that can come from a loan syndicate of several banks rather than one bank taking all the risk itself.
News of the growing doubts about the Ping An deal sparked intense discussions online about CDB's role.
Some questioned why the policy-bank-turned-commercial-lender wanted to fund a foreign firm's purchase of a major stake in a homegrown financial market leader, a rare move for a local bank.
If the Ping An deal were to collapse, due to some extent to CDB's U-turn on the loan (although regulatory concerns could also scupper it), it may cast a shadow over CDB's reputation.
Influential Hong Kong shareholders' activist David Webb said: "The completion is conditional on CIRC approval by February 1, and since CDB and CIRC are both government-controlled, the government could relieve CDB of its obligation by failing to approve the transaction in time."
Whatever happens, it will be a lesson well learned for CDB.