Banking & Finance

Ever growing shadow

A dodgy deal defaults, leaving a bank on the hook

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A bank with a very heavy exposure to Chengdu’s property market

Women and money are two of the worldly concerns that Buddhist monks are supposed to avoid. So it came as a shock when a woman was killed at the Guangfu Temple in Jiangxi province this month. She is thought to have pressed for repayment of a loan to the temple of Rmb10,000 ($1,625). The suspected killer is the abbot, who is being charged with murder.

Chinese investors were equally surprised last week by the unravelling of yet another debt tangle, this time in the banking sector. An off-balance-sheet product has left a state-affiliated lender on the hook for at least Rmb4 billion, the People’s Daily has revealed. Worse still, the capital in question was lent to two of its own shareholders. The collateral they put up for the loan? The lender’s own shares.

Back in August 2013, Evergrowing Bank set up an asset management scheme for two of its shareholders via a trust firm. The two, which owned a combined 6.5% stake in Evergrowing, were affiliated to real estate developer Mind Investment. With Evergrowing acting as the guarantor, Mind Investment was then able to obtain Rmb3.7 billion in funding from two Tianjin banks.

Mind Investment then failed to repay the loans on time. The People’s Daily said last week that Evergrowing has now repaid the principal on the loan, plus Rmb300 million in interest, indicating that Mind Investment has defaulted. The full repayment obligation equates to a hefty 58% of Evergrowing’s 2013 net income.

Evergrowing – which runs more than 100 branches nationwide – has argued that it is merely “acquiring financial assets in a normal interbank operation” and that the credit risk involved is “manageable”.

However, the domestic media has described the prior lending arrangements as “hidden inside a drawer” and warned that it looks like they bypassed regulatory rules.

“It is against the rules for a bank to provide an undisclosed guarantee for a connected party. And it is worse for a bank to accept its own shares as collateral,” an insider told CBN.

The People’s Daily reports that the dodgy lending was uncovered after new managerial staff were appointed at Evergrowing. The lender has since set up a special task force to investigate the risks involved and the Shandong government is looking into the matter as well, it said.

Before forcing Evergrowing to take a bullet on its behalf, Mind Investment had a strategy to combine property development and tourism. According to 21CN Business Herald, it planned to invest Rmb2.3 billion in a variety of ‘cultural heritage’ real estate projects in Chengdu. “Its biggest shareholder is also an enthusiastic art investor. It operates six museums, of which five are in Chengdu, with more than 13,000 relics,” 21CN reported.

Sales at one of these Chengdu real estate projects have now become a crucial factor for Evergrowing as it tries to recoup the Rmb4 billion owed by Mind Investment. (Based on the bank’s net book value, the shares in the bank owned by Mind Investment and offered as collateral on the initial loans are worth Rmb2.3 billion.)

That means Evergrowing bosses need good news from Chengdu to help meet the shortfall. But “construction progress is behind schedule” says 21CN of the property project.


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