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Colossal Default Exposes WMP Risk Blind Zone

12-18 13:52 Caijing
Historically, China's banking regulator has resolved these types of issues through administrative intervention. The question this time is should Hua Xia Bank be held responsible for investors' losses?

By staff reporters Dong Yuxiao, Qu Yanli, and You Xi

Hua Xia Bank, a joint-stock commercial bank based in Beijing, has been mired in a crisis of trust for the past three weeks.

On Nov. 26, investors in Zhongding were shocked to learn they may lose their entire investment on a high-yield wealth management product (WMP) purchased from Pu Tingting, a wealth manager at the Jiading sub-branch of Hua Xia Bank.

The Economic Crime Investigation Division of Shanghai Public Security Bureau has been investigating the case and detained Pu on Nov. 29. It is reported that the case will be transferred to the judicial authority after a two-month investigation. Hua Xia Bank claims it did not authorize the sale.

Since the second half of 2011, Pu, who previously worked at the Jiading sub-branch's VIP Chamber for three years, began peddling a high-yield WMP to friends and VIP customers. The one-year investment product sold for 500,000 yuan a share and offered an estimated yield of 11-13 percent.

But unlike other WMPs, the investors only got a partnership agreement signed by Beijing Zhongding Wealth Investment Center (Limited Partnerships), a letter guaranteeing the implementation of the agreement signed and issued by Zhongfa Investment Guarantee Co., Ltd, and a letter from Commercial Finance Asset Management Co., Ltd. confirming their subscriptions. None of the documents bore the seal of Hua Xia Bank, nor were they signed by Pu.

Some investors told Caijing that Pu took them to the Jiading sub-branch's counter to transfer money after they agreed to invest in the product, and they did not receive the contracts until a month later.

Mr. Xu, Pu's husband, said that besides Pu, several other wealth managers at the sub-branch also participated in the sale of Zhongding's WMPs. Caijing learned that Jiang Li, head of the sub-branch, bought Zhongding's first- and third-phase products, and Pu bought the company's third-phase product.

The four-phase partnership project raised a total of up to 120 million yuan. According to people familiar with the case, Wei Chenyang, chairman of Henan Xintongshang Investment Group Ltd. Co., is the financier behind the scene and actual controller of the project. He was detained by local police after the WMP defaulted.

The project previously operated for a year with hardly any risk controls in place, and was not exposed until it defaulted upon maturity. With numerous similar WMPs still on the market, more defaults are expected.

Upon learning of Zhongding's default, Hua Xia Bank denied any connection with the project, claiming that Pu, after establishing contact with the Henan corporation in need of financing through an intermediary, bypassed the intermediary to contact directly with the Henan company. The guarantee company, which is supposed to play a key role in project risk control, also refused to assume responsibility, citing fraud by the Henan company.

An insider at the China Banking Regulatory Commission (CSRC) told Caijing that the incident, having caught the attention of senior officials in the central government, has aggravated high-level officials at the banking regulator. Judging from past experience, the incident is less likely to go to a public trial. The CSRC is inclined to resolve the issue through administrative intervention, said the source. For the regulator, the most important question now is should Hua Xia Bank be held responsible and ordered to pay for investors' losses?

Several banking industry insiders emphasized that investors should bear the risks while banks fulfill their responsibilities. Weak supervision or lack of regulation constitute no reason for banks to compensate investors' for their losses, said the insiders.

China International Capital Corporation Limited (CICC) released a report Dec. 4, stating the incident has symbolic importance to the domestic banking industry, and that the regulator should not force Hua Xia to pick up the tab and instead adopt market-oriented approaches such as liquidation, mortgage, pledge, and equity transfer by issuers and guarantors to avoid further distortion of risk pricing in the sector. 

1 yuan = 16 U.S. cents

Full article in Chinese: http://magazine.caijing.com.cn/2012-12-16/112366968.html

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