The move is the latest in a series of measures by the Shanghai government to strengthen its regulation of the city's property market.
HONG KONG: Expect more nasty paper trails in China. Regulators have fined Guangfa Bank a record US$109 million for the role its employees played defrauding fixed-income investors using forged letters of guarantee.
The country's financial system relies heavily on such paper pledges, which can facilitate lending to otherwise dubious borrowers, but the practice has been abused for years.
The Guangfa case, involving 12 billion yuan, or $1.8 billion, and 10 financial institutions, came to light following bond defaults by phone maker Cosun Group. Investigators found employees at a local bank branch had forged guarantees using faked company seals.
The China Banking and Regulatory Commission said the Guangfa employees had colluded with Cosun to hold down Guangfa's non-performing loan ratio. That suggests the bonds were issued so Cosun could repay loans sitting on Guangfa's balance sheet. If defaults rise in 2018, as many analysts expect, more cases like this could come to the surface.
Although the fine is unprecedented, everything else is familiar. Given suspicions of endemic book-cooking by private companies in China, investors are wary of lending to them absent support from a third party with verifiable collateral, or government backing. A vast, unmeasured industry has thus sprung up to provide such assurances. Without a centralized database, it has been easy to pledge the same collateral against multiple loans. A failure by one guarantor can trigger dozens of defaults by firms holding loans it guaranteed.
The practice does lubricate lending in a system still learning the art of risk assessment, meaning officials are unlikely to ban it outright. So tougher punishments are to be applauded; big fines and harsh sentences may frighten some operators into upgrading internal controls. A national database of pledges might also help, as would reducing the reliance on archaic paper and red-ink stamps, both of which can be forged. Yet computer systems have been misled too.
Guarantees are ultimately popular – even useful - because they help counterbalance the system’s reluctance to lend to private borrowers. Short of halting their use entirely, however, there could be more scandals ahead.
To recap, China's banking regulator said on Dec. 8 it had fined China Guangfa Bank 722 million yuan ($109 million) for providing faked guarantee documents to support corporate bond issues. It is the largest such fine handed down by the China Banking Regulatory Commission, equivalent to 8 percent of Guangfa's 2016 profit according to Reuters calculations.
The bonds were issued by Chinese phone maker Cosun and sold via an online platform run by Ant Financial, which is affiliated with e-commerce giant Alibaba Group.
The bonds defaulted in December 2016, at which point it was discovered that the guarantee documents had been faked by employees at Guangfa Bank's branch in Huizhou. The CBRC said the bank employees had colluded with Cosun. - The CBRC said the fraud involved 12 billion yuan and more than 10 financial institutions. - Reuters
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