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Huarong debacle highlights problems at hundreds of Chinese banks

(Bloomberg) – Lai Xiaomin, former chairman of China Huarong Asset Management Co., was found guilty of accepting $ 277 million in bribes, as well as bigamy, crimes serious enough to see him summarily executed in January. consequences – are rare in any country. But in China, more modest but still blatant mismanagement is common in the $ 54 trillion financial sector. In 2020 alone, the country’s leading bank regulator issued nearly 3,200 violations against institutions and 4,554 against individuals, ranging from senior executives to regular staff; it imposed fines totaling 2.3 billion yuan ($ 352.2 million). In the US, which has a much longer history of bank regulation, the Federal Reserve took a total of 58 enforcement actions. Among the violations, Chinese investigators found fabricated financial statements, nannies and drivers installed as controlling shareholders, and favorable rates and sweetheart deals for investors and family members. The state has also rescued three ill-managed petty moneylenders and pooled dozens more since the first crackdown three years ago. Nevertheless, 12.4% of the 4,400 financial institutions are considered to be at high risk of central bank bankruptcy. Now the government is rewriting the commercial banking law and will have “zero tolerance” for violations. “Bad governance is clearly a risk to financial stability,” said Alicia Garcia Herrero, Natixis SA’s chief Asia economist. If it’s included in the country’s smallest settings, the chances of damage are minimal, she added. “The problem is we don’t really know if governance issues are really being mitigated and this is the big risk.” picture of the costs of mismanagement and uncontrolled corruption. Huarong, which has about $ 42 billion in outstanding debt at home and abroad, delayed its earnings report in early April and began a spiral in which its bonds plummeted to a low of about 52 cents a dollar. Shares are down 67% since debuting in 2015 and are currently suspended. A spokesman for China Huarong said on Thursday that the company “learned from Lai Xiaomin’s case, firmly implemented central government policies, continued to eliminate the toxic influence, recovered our corporate governance, accelerated business transformation and management reform, and improved corporate governance. to evolve towards a stable and better development. It is the second time in two years that creditors have been at the mercy of bad actors. In 2019, China shook global markets with a surprise seizure of Baoshang Bank Co., once seen as a model for funding regional economies. The acquisition and eventual bankruptcy of Baoshang, triggered by the misappropriation of funds by its controlling shareholder, also cast doubt on long-standing assumptions of a perpetual backstop by the government. financial system on bank directors, shareholders and executives, saying in a December statement that “ineffective corporate governance is the root cause”. In one example, a rural bank lent the equivalent of 95% of its net capital to its shareholders and affiliates. to the CBIRC, which did not name the bank. Most of those loans defaulted or failed to deliver. The largest single bank shareholder increased revenues by 80 million yuan to keep the institution looking profitable. Elsewhere, one person and 22 of what the regulator described as his “shadow affiliates” had stakes in 17 banks, which far exceeded the limits of bank ownership. The regulator has also identified bad behavior in its own ranks and has charged his officer with the oversight. of rural banks under investigation for serious disciplinary and legal violations. Employees have also been able to voice grievances and reports of misconduct on social media. Earlier this year, a whistleblower at China Life Insurance Co. on the social network Sina Weibo that the head of the branch had concocted customer signatures and pocketed millions of dollars in nonexistent marketing costs. Following a CBIRC investigation, the company said in a statement that it had generally been fined 510,000 yuan for inadequate internal controls and pledged to improve compliance education. In response to increasing risks, the central bank is revising its commercial banking law. The proposed changes include a new chapter on corporate governance, specifying for the first time the responsibilities of shareholders and the key role of the board of directors. It also prohibits entities from using borrowed money to invest in banks and prohibits directors from holding positions in more than one member institution, unlike the US and Europe, where misconduct and mismanagement often lead to public outrage, legal investigations and even high-profile layoffs, top leaders have so far been isolated in China. Senior executives are rarely held responsible for industry-level violations, and the financial sanctions pale in comparison to the 1.9 trillion yuan in profits the industry made last year. “This is a work in progress,” said James Stent, author of China’s Banking Transformation and a former banker who has served on the boards of two Chinese lenders for more than a decade. “Governance is generally good at major priority banks, but problems persist at lower-level financial institutions. They take time to deal with, and governance will always be imperfect. For more articles like this, visit us at bloomberg.com Subscribe now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP

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