Banking & Finance

The Mongolian hot spot

Risks at regional lenders sees probes spread from Baotou to northeast


Xiao: arrested in 2017

“The mountains are high and the emperor is far away” goes an old Chinese proverb, meaning that the power of the imperial court reached its governance limits in more remote regions.

The same maxim seems to have applied at Baoshang Bank in distant Baotou too. According to the domestic media, the lender from Inner Mongolia served as the ‘money bag’ for the influential financier Xiao Jianhua, supporting much of the illegal dealings of his sprawling Tomorrow Group.

But in Xiao’s case the emperor struck back: in early 2017 he was snatched from Hong Kong’s Four Seasons hotel, where he had been a long-term guest. He was then ferried across the border into mainland China (see WiC354). The ensuing investigation resulted in the seizure of Baoshang Bank by the state (see WiC454) and since November its liquidation.

The investigation into Xiao has yet to conclude. But in a sign that the authorities have completed the untangling of Tomorrow’s financial affairs, the Central Commission for Discipline Inspection (CCDI) published its long-awaited verdict last week on some of the most senior banking regulators in Baotou and the wider Inner Mongolia region.

The officials include Xue Jining, head of the Inner Mongolia branch of the China Banking Regulatory Commission (CBRC) between 2007 and 2014 (the banking regulator was later merged with its insurance sector counterpart to form the CBIRC).

The verdict was damning: the 66 year-old had accepted Rmb400 million ($62.7 million) in bribes, with five other officials revealed to have received more than Rmb700 million in illicit cash in total. At least 80% of the dirty money was related to Xiao’s Baoshang Bank, investigators said.

From 2009 to 2016 CBRC officials in Inner Mongolia joined more than 50 on-site inspections of Baoshang Bank. Incredibly, the graft investigators said there wasn’t a single regulatory action required. Instead, the corrupt banking officials continued to give the lender a clean bill of health in exchange for monetary incentives.

“The fall of Baoshang Bank was primarily because of the illegal dealings of unlawful financial groups but corrupt regulators have also played a part,” the CCDI concluded.

WiC reported last week how Xiao’s arrest in early 2017 set the tone for a turbulent year in which the financial regulators turned the spotlight on some of China’s richest tycoons (see WiC542).

They now seem to have turned their attention to the regional banks that were implicated in some of the scandals; as well as to how these smaller lenders have contributed to wider risks across the financial system.

Scarred by the failure of Baoshang Bank – whose condition is said to have come close to triggering a bank run in Inner Mongolia – the CBIRC is now looking into alleged transactions between property giant China Evergrande and Hong Kong-listed Shengjing Bank. According to WeNews, a premium news service offered by Caixin Weekly, the Liaoning-based lender – which counts Evergrande as its biggest shareholder – has acquired a lot of the real estate developer’s debt.

Shengjing is reported to have total exposure of at least Rmb130 billion to Evergrande, Bloomberg also reported this week. “That’s a huge amount for a commercial bank in a provincial city. With just Rmb79 billion in Tier-1 capital, liquidity issues at Evergrande could have wiped out Shengjing’s entire equity buffer, resulting in a possible bankruptcy or state-led bailout,” the news agency warned.

Evergrande’s share price has dropped more than 10% over the past month. Two of its other Hong Kong-listed units, Evergrande New Energy and Evergrande Property Services, have plunged nearly 40% and 30% respectively. That means that billions of dollars of market value have evaporated during the equity rout, which seems to be linked to the regulatory probe.

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