3 Billion Yuan Fake WMP at Beijing Branch of Minsheng Bank
As long as credit is expanding, fraudulent lending activities can be papered over. Once the credit cycle peaks and reverses, high-risk, highly-leveraged, and fraudulent activities are revealed. The latest is in Beijing, where a 3 billion yuan fake WMP was supposedly sold at the Hangtian Qiao branch of Minsheng bank. Investors came to collect their funds after the WMP matured, but the bank refused to pay. A few hours later, the bank was filled with investors looking for their money and the branch shut for the day. Police are investigating and investors have formed an investors’ rights group. It is believed the bank (or rather employees at the bank misdirecting bank capital) may have tapped private banking customers to cover a funding shortage created by their activities. The bank official(s) may have forged bank seals to make unapproved loans.
The investors are all VIP customers and most are members of the Jingzuan Golf Club. This club may be created by the bank or has a very close relationship because a year ago they hosted a golf tournament with this group. See this story from Leshi sports April 2016: 2016民生银行航天桥支行鲸钻高尔夫俱乐部开杆赛
Regarding the fake WMP:
In response to the above risk events, Minsheng Bank has set up a working group to assist the public security departments to investigate and strive to find out the facts as soon as possible, to maximize the protection of funds, to properly resolve the demands of all parties and bear the relevant responsibilities. In addition, Minsheng Bank said the daily operation of the Hangtian Qiao branch is normal.
Caixin speculates management of the branch may have used the 3 billion yuan to cover an off-balance sheet shortfall as part of aggressive lending schemes. This would make it similar to fraud cases that exploded in late 2016.
Forged seals, fake letters, and counterfeit documents. They’re all part of China’s recent spate of fraud coming to light in the country’s $3 trillion corporate debt market amid a rout that has analysts predicting a record number of defaults in 2017.
As it becomes harder for Chinese companies to issue new notes to repay maturing debt, expect more scandals to come — and to worsen the bond market’s already-precipitous downturn.
“We expect to see more of this type of behavior given the increasingly problematic environment for refinancing in the domestic bond market,” said Charles Macgregor, head of emerging markets at Lucror Analytics in Singapore. “Unfortunately, these frauds may be difficult to detect, as documentation and seals may appear authentic given collusion between various parties.”
…Within two weeks in December, two fraud cases emerged that shook the bond market by threatening to undermine confidence in the ability to collect on the enormous amount of credit that’s built up in the nation. China Guangfa Bank Co. said documents and seals in its name had been forged for use on a letter to guarantee bond payments. Separately, Sealand Securities Co. said former employees conducted as much as 16.5 billion yuan ($2.4 billion) of bond trading with a forged official seal, or chop.
The alleged forged stamps at Sealand, which it has said are being investigated by the police, were on so-called entrusted holdings, a widely used tool to boost leverage in China’s debt market. Under such structures, investors legally skirt rules by entrusting their note holdings to a third party and agreeing to buy them back later. That frees up funds on their books that they can use to purchase more bonds.
Caixin describes this as an internal bank control “black hole.” Sealand Securities fraud case invovled 20 financial institutions at the end of 2016.
The case involves a number of rediscount banks, one at the end of hundreds of private banking customers, although the case, but exposed a major bank internal control black hole.
…At the end of 2016, Guocheng Securities and more than 20 financial institutions, the Agricultural Bank Henan Branch and Ping An Trust, Jiangyin Bank and Hengfeng Bank, Guangdong Development Bank and Fortune, Zhejiang property insurance, etc., are “fake seals” Disputes, triggering market shocks.
Police in the Minsheng case have one branch executive in custody:
Financial reporter from a number of close to the Minsheng Bank and regulators confirmed that the suspect, Minsheng Bank Hangtian Qiao branch Zhang Ying has been the Beijing Haidian District Public Security Economic Investigation Department control, his home and office were searched by police; Hangtian Qiao branch vice president Xiao Ye “lost”, has not been brought to justice. It is not clear whether Minsheng Bank has dealt with higher-level people internally.
How many more fraud cases exist in China’s 30 trillion yuan WMP market? With the CBRC targeting fraudulent activities and the PBoC working to restrain credit growth, we may soon find out.