South China Morning Post
The disappearance of 3 billion yuan (US$436 million) from China Minsheng Bank’s private banking accounts has once again highlighted Chinese banks’ weak internal controls and the risks associated with the sale of so-called “innovative” wealth-management products on the mainland.
An accidental inquiry from an investor exposed the fact that the WMPs sold by a Minsheng branch didn’t even exist. When shocked investors rushed to the bank, they found the head of the branch had been taken into police custody and the supposed due payment date had passed.
Investors are still waiting for compensation as well as a detailed explanation from the bank.
“If we can’t even trust a big national bank, what other financial institutions can we trust?” Liu Min, who bought 12 million yuan worth of WMPs from Minsheng, said as he waited in the lobby of the Hangtianqiao branch of Minsheng Bank to hear news. Two million yuan of the WMP he invested in is was “due” April 17 but he can’t get the money back.
Liu, 52, was one of 150 private banking customers of Minsheng who had bought the WMPs. In most cases, their ties with the lender go back 10 years when the Hangtianqiao branch joined them up in a “golf club”. Under the programme, they frequently invested in the products offered by the branch and in return, the bank paid for them to go on golfing trips domestically and overseas.
“We have bought the banks products for many years and none of the previous one had trouble,” said an investor surnamed Li. “Many other institutions peddle various products to me but I didn’t buy them because we trusted the [Minsheng] bank. We are not yield hunters.”
Minsheng said on Tuesday it has launched a working group to co-operate with police to investigate the case. Zhang Ying, the head of Minsheng’s Hangtianqiao branch, was detained on Friday. The bank said it will try its best to safely secure the funds and assume legal responsibility.
Although defaults of WMPs issued by smaller banks, non-bank financial institutions and online lenders are not uncommon in China, such incidents at big banks – and this case an unapproved WMP – are rare.
The Minsheng case involved an “innovative” WMP in which yields were amplified by purchasing a secondhand WMP. Consecutive interest rate cuts and a flood of WMPs sold on the mainland market over the past three years have already seen wealthy investors shun common WMPs with unattractive yields.
According to investor contracts seen by the South China Morning Post, Minsheng’s private banking customers purchased transferred WMPs from the original investors. Bank employees told the buyers that the original investors urgently needed cash and were willing to cash out of the WMPs, which at the time were not yet due, and forego the supposed yields. As a result, the original WMPs that guaranteed principle and at least 4.2 per cent annual return “turned into” a product with more than 8 per cent annual return. Bank employees said the products were exclusively for longstanding private banking customers who owned at least 10 million yuan in financial assets.
If we can’t even trust a big national bank, what other financial institutions can we trust?LIU MIN, INVESTOR
Last week an investor happened to ask a friend who works at a bigger branch of Minsheng about the WMP at Hangtianqiao, but was told it didn’t exist. Officials at the Beijing branch of Minsheng subsequently reported Zhang Ying to the police, who then arrested her. By Thursday night all investors had become aware of the situation.
The 150 members of the so-called “golf club”gathered at the Hangtianqiao branch the next day demanding an explanation. They also visited the China Banking Regulatory Commission and its Beijing subsidiary, as well as the headquarters of Minsheng Bank, and the China Securities Regulatory Commission. However, no clear answers have been given to them to date.
A spokesman for the group told the Post on Tuesday that besides the “golf club”, a number of smaller investors got caught in the hoax, so the amount of money involved could exceed 3 billion yuan.
The money was used to cover up a financial black hole left when managers of the branch were unable to recover from a commercial paper scheme. Managers covered up the loss with a 3 billion yuan loan, and they then had to “fill” the loan hole with other sources of funding, according to a media report on Tuesday. Caixin reported that the branch managers converted the commercial notes into bankers’ acceptance, with higher credit and a lower rate, using fake seals.
The Minsheng case has come at a time when the CBRC has launched a crackdown on banks’ transgressions, including bank employees’ colluding with clients to forge unapproved lending programmes and sell them to investors.
BEIJING — When Lisa Wang sank her retirement money — all $730,000 of it — into a single investment, her fund manager repeatedly said the product was risk free.
On Wednesday, Ms. Wang, 61, joined about a dozen other customers in the lobby of a Beijing branch of the bank China Minsheng, pressing employees for details and demanding their money back, after the Chinese news media reported that more than $400 million of investors’ money had disappeared.
“I invested because they told me it’s a product that would guarantee my capital,” Ms. Wang said. “I’m so angry and disappointed.”
The scandal highlights a big and growing risk in the Chinese economy: trillions of dollars of opaque financial products with little regulation and oversight.
Typically marketed as low risk, these investments, known as wealth management products, offer tantalizing returns that seem to handily beat the interest rates that banks offer on regular accounts. Lured by the assurances of safety and promises of profit, investors have plowed their savings into the products.
But many of the investments have focused on coal, steel and real estate — areas that are facing overcapacity problems in China. As those areas show signs of trouble, the worry is that many of the investments could fail, creating a major shock to the Chinese economy, the world’s second-largest, after the United States’.
The products, which are often kept off banks’ balance sheets, are part of a vast, shadowy system of lending that has girded the Chinese economy and kept businesses growing. The Chinese government has stepped in to protect investors, avert ripple effects and ensure social stability.
But those bailouts create their own challenges. Investors, assured that the government will come to the rescue, do not worry about the potential risks and continue to pour money into the products. According to the state news media, Chinese investors have put $4.4 trillion into wealth management products, equivalent to about 40 percent of the country’s annual economic output.
“It invites moral hazard,” said Victor Shih, an associate professor at the University of California, San Diego, who specializes in the politics of Chinese banking policies. “When you tell people that they will get bailed out, then they will engage in very, very risky behavior and also opportunistic behavior on the part of the banks.”
China Minsheng, the bank at the heart of the latest scandal, had a good pitch.
The product, it told investors, would provide a return of 8 percent to 27 percent. To sweeten the deal, the bank offered free golf events and trips to South Africa and other overseas locales.
Encouraged by the bank’s strong reputation, investors, including many older people, forked over a minimum of $145,000. “My fund manager stressed again and again that there is no risk,” said Ms. Wang, the investor.
The scandal at China Minsheng erupted when a Chinese newspaper, the 21st Century Business Herald, reported on Tuesday that the bank’s wealth management product was forged and did “not exist.” The paper said more than 120 investors had registered to ask the bank to refund their investments and carry out an investigation.
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Tags: China Banking Regulatory Commission, China Minsheng Bank, China Securities Regulatory Commission, Chinese banks’ weak internal controls, Hangtianqiao branch of Minsheng Bank, innovative wealth-management products, opaque financial products, private banking accounts
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