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Sold as a "takeover," the regulatory action against Baoshing Bank is much more than that.

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Author: 
Editorial Staff

In the North West of China, in the district of Inner Mongolia, a small private bank started to get into trouble. The warning signs, with hindsight, were apparent but it's a kind of problem that, while common in Russia a couple of decades ago, is not usual in China. The results, however, are predictable for both financial and cultural reasons.

Some years ago, this newspaper used to carry a register of US banks forced into either closing their doors or being absorbed by other banks. Some, despite the USA's must vaunted regulatory system, had, even under supervision, fallen into such a state that no bank would take them over. In one year, 2011, there were 167 bank failures. In fact, so far this century, only three years have had zero bank failures - but those figures are slightly misleading because weak but not basket-case banks that are not subject to FDIC action but are taken over are not included.

It is, therefore, to China's credit that when the combined action by the People's Bank of China (the central bank and regulator) and the China Banking and Insurance Regulatory Commission took over, it was the first time since the 1990s that a privately owned bank in China had been subject to such action. However, when one looks back, there are signs that both the PBoC and the Commission might have taken more seriously before eventually concluding that the bank demonstrated "severe credit risk."

We should define "private bank" in this context: it is not a private banking provider but it is a privately held bank. However, its primary customer base, it appears, was companies within the Tomorrow group, much as had been the case with the banks within chaebols.

The bank's shareholders includes a company which, because of transliteration issues, is variously known as Tomorrow Holding or Tomorrow Holdings Company Limited. It's an investment group, sometimes called a conglomerate but that's not entirely accurate, and its boss, XIAO Jianhua ( 肖建华) . Although officially "based in" Beijing, the group's software, IT hardware and peripherals, systems integration business operates China-wide. It also has, within the Group, a securities broker, according to Bloomberg.

But, in early 2017, warning signs started to become public. A Reuters report said that the company had been told that thousands of millions of dollars worth of assets had been put up for sale. That included, the report said stakes in more than 30 domestic financial institutions. Separately, there were reports that XIAO was, let's say "helping the authorities with their enquiries." Recent reports say that he has not "been seen" since early 2017. In May 2018, the China Economic Review said "Tomorrow has been shedding assets under governmental pressure which it had recently acquired through a series of debt-driven spending sprees. Last month, the company signed an urgent agreement to sell all of its shares in Guangdong-based Lianxun Securities Co., and three months previously offloaded its RMB 9 billion stake in Hong-Kong listed Hengtou Securities Co." although there were questions as to whether that deal would be completed. Exactly what XIAO is being investigated for, if indeed he is being investigated at all, is not known. Caixing Global says it is suspected that it is corruption but there is no confirmation of that.

The bank tried to find investors or a purchaser but without success and, while doing so, failed to file its annual reports for 2017 and 2018. But, say reports, its loan-to-deposit ratio went up significantly, to more than 80%, in 2016. By the end of Q3 last year, its position was critical and, by the middle of this year, untenable. Alert to the possibility of failure regulators had to act.

 


 

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