A very sub-prime borrower

At a business forum several years ago in Yunnan Province, Wang Shi, the chairman of Vanke, the largest publicly traded property developer in China, gave a speech to several hundred executives about how Vanke has prospered without paying a single bribe. “The audience was dead silent,” he told the New York Times. When the forum’s next speaker openly admitted to paying bribes, arguing that business in China was impossible without them, the crowd erupted into applause.

It is no secret that business in China is often characterised by dirty dealings, and the real estate industry is especially prone to abuse. The latest property scandal involves Zou Qing, head of Beijing-based property developer Huayunda Holding, who has recently been sentenced to life in prison for contract fraud – in cases dating back to 2002.

According to the 21st CN Business Herald, between 2000 and 2002, Huayunda Property, which was owned by Zou, applied for 199 mortgage loans from Bank of China’s Beijing Branch by forging sales contracts.

Zou forced his employees and friends to “rush to buy” the apartments in his Senhao project long before they were completed. Armed with false certificates of income, Zou’s stooges took out a combined Rmb750 million ($109.5 million) worth of mortgage loans from Bank of China.

But in 2002, construction of the Senhao apartment project was suspended, leaving an unfinished building in Beijing’s Chaoyangmen area. The money, as it turns out, was transferred out of Zou’s Huayunda account to Huaqing Times Investment Group – also owned by Zou – who had used most of the proceeds as a guarantee for further borrowing. By the time Zou first stood trial in 2006 as the alleged mastermind of this loan fraud, he was thought to have obtained fraudulent loans from other banks of at least Rmb2 billion.

“What should be cast into doubt is why did the bank issue the loans so quickly,” asks Lu Lei, a banking analyst. “Where is the internal risk control mechanism of the banks?”

The banks’ error in approving Zou’s borrowing now looks like a glaring one. But during the due diligence process, Bank of China did discover that Zou’s “buyers” were all linked to his own real estate companies. This was not the only danger signal. The bank found too that Zou’s companies were responsible for the monthly mortgage payments.

So why did they continue to lend, despite such clear red flags? According to Caijing magazine, banks often turned a blind eye to dubious loans in light of the fierce competition between commercial lenders. In fact, it had been an open secret that they were extending mortgages to “individual buyers” borrowing not for themselves but on behalf of real estate developers, said an insider to the Beijing Times.

Zou’s story serves as a general reminder of an earlier era when non-performing loans made up a large proportion of the banks’ total loan books. In 2003, non-performing loans stood at 20.4% of the banks’ total loan books, a face value equivalent to 16.5% of GDP at the time. It took a period of hard-won reforms (and plentiful injections of government cash) to reduce the figure to 2.5% of total loans by the end of 2008.

Are the banks in danger of backsliding? With more than Rmb4.5 trillion of new lending in the first quarter, it does look possible. Various commentators in the Chinese press are also expressing concern.

It also sounds like there are going to be more cases like Zou’s. In April, Xi Xiaoming, vice president of the Supreme People’s Court, said evidence of false mortgage applications had begun to emerge again.

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