Breaking the bank

Cleaning up its Hangzhou portfolio

Everett Dirksen, a former Republican senator for the state of Illinois is remembered less for his legislation than for a throwaway remark that he may not even have made. “A billion here, a billion there, pretty soon you’re talking real money,” he is thought to have quipped to Johnny Carson. No record of the remark exists, but it is so good it has entered into quote folklore nevertheless.

Dirksen made the comment in the sixties, but it will resonate today with top executives at China Construction Bank (CCB) as they ponder their worst ever bad loan.

At the centre of the storm is Zhejiang Zhongjiang Holding, a Hangzhou-based conglomerate, which went bankrupt earlier this year owing Rmb8 billion ($1.2 billion) to nearly 70 creditors. The top lender was China Construction Bank, which lent Rmb3 billion to the company, reports Century Weekly.

“This is the largest loan crisis that has ever happened to CCB,” a senior regulatory official told the newspaper.

Other banks are also exposed: Bank of China had handed over Rmb1 billion, while ICBC lent Rmb150 million. The total debt outstanding is a record for Hangzhou.

Zhongjiang is the namesake of Yu Zhongjiang, a former taxi driver who made his first fortune running a car rental service, reports the Shanghai Daily (for a profile of Yu and his firm, see WiC 136). The company then moved into a number of different business areas but it was real estate (what else?) that would prove its undoing.

The slide started in 2008, when Zhongjiang tried to convert an unfinished building next to Hangzhou’s scenic West Lake into a luxury hotel.

By then the company was already in financial problems due to other failing property ventures. But as the government started to curtail prices in the real estate market, Zhongjiang’s access to credit dried up, and so too did its cashflow, forcing the company to turn to loan sharks to finance the project, reports the Shanghai Daily.

Still, CCB seems to have been willing to extend its credit line, even as its peers were losing hope. In the summer of 2011, Bank of Communications recalled a Rmb100 million loan, due to risk concerns, reports Century Weekly. But only a few months later, CCB issued a wealth management product that raised Rmb300 million for Zhongjiang (these products are sold to the bank’s richer clients, and offer a higher interest rate to compensate for risk; as of the first quarter there were Rmb10.4 trillion of wealth management products outstanding, the equivalent of 12% of total bank deposits, calculates the Financial Times).

The Zhongjiang news comes amid a wider panic about the debt situation in Zhejiang province. Earlier this year, a complex network of mutual guarantee agreements, where borrowers take on responsibility for each other’s debt, started to unwind after the collapse of a fairly minor construction company (see WiC157).

The general unease about Zhejiang, as well as broader concerns about bank loan books, brought a sharp reaction from investors. CCB shares dropped 6.5% in Hong Kong over the course of Wednesday and Thursday last week as the market tried to digest the scale of the problem.

CCB has started to clean up its operations in Zhejiang. The bank’s local president, Cui Binzhou, was removed from his post and there are 50 more employees tied up in the investigation.

The man at the centre of the crisis, Yu Zhongjiang, has now been in police custody for three months already, according to reports. But up until his arrest, he seems to have done a remarkable job of keeping his creditors at bay.

Reportedly, Yu has never paid a penny in interest on CCB’s wealth management product.

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