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Lui Jinbao: sudden recall |
Suspicions that another Chinese banking scandal was about to break first emerged on May 29 when Liu Jinbao, head of the Bank of China (Hong Kong), was suddenly recalled to Beijing by his bosses. The Bank of China at first insisted that it was just a routine relocation.
But it couldn’t deny that the timing was bizarre. Liu was asked to leave his office one day before the bank’s first annual shareholder meeting since being listed last July. It wasn’t until two weeks later, on June 11, that it was officially announced that Liu had been arrested and was under investigation for illegal loans to a Shanghai real-estate tycoon made during Liu’s time in charge of the area during the 1990s. The money, it is believed, was used to speculate on the Chinese stock market.
In response to the newly discovered problems, the Hong Kong Monetary Authority is believed to be interested in taking a closer look inside the Hong Kong arm of the bank.
Corrupt banks Just after this announcement, as politicians, bureaucrats and analysts regained their composure, Li Jinhua, head of China’s national audit office, appeared before the standing committee of the National People’s Congress in the last week of June and declared that another two banks were guilty of illegal behaviour.
This time the perpetrators were China Construction Bank and Agriculture Development Bank. Li charged that after a random audit of eight branches of China Construction Bank in Gangzhou Province his department had found a large number of fraudulent and illegal loans to the tune of $120 million. Although many of the loans were used to speculate on the equity markets, one case involved a senior police chief who had illegally obtained millions of dollars for mortgages. CCB was also accused of holding and operating several secret accounts with several hundred million renminbi in them.
If this weren’t enough, it is believed the bank made substantial errors in its profit-and-loss figures in 2001.
Agriculture Development Bank was also caught out. It was found that the bank retained a company on its books to buy electronic equipment and cars. But it did other things too, such as taking a Rmb920 million ($111 million) loan and investing Rmb810 million in the stock market. Between the two banks there were 52 cases of alleged fraud with up to 75 members of staff facing prosecution. Many observers say that more cases of corruption will likely emerge as the Chinese government gets serious about cleaning up illegal banking practices.
In between the Bank of China problems and the under-the-table lending practices of the other two banks, S&P released its damning report. It told the world that in its opinion it would take the Chinese up to 20 years to clean the banking system of its non-performing loans and get the figure down to 5%. S&P also went some way to dismiss China’s claims that NPLs for the sector as a whole stand on average at just 24%.
It was a blow for the sector, which for the past couple of years has been trying to remove doubt about its figures by claiming to use international accounting practices for classifications of loans. However, according to S&P, NPLs are closer to 50%. It goes on to explain that the huge difference is in part a result of banks’ branches across the country inconsistently and incorrectly applying the loan classification system. If S&P numbers are correct it would mean that for the country to write off the necessary amount of NPLs from the system the government would have to spend around $500 billion, or 40% of China’s $1.3 trillion GDP.
Many in China’s banks would just like to forget that June ever happened.
