Loose bank management leads to massive loan fraud

By staff reporter Zhang Yingguang

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The high-end apartment building project, once called Tianyu Mansion, has been linked with the fate of three notorious figures in the Beijing financial circle -- the first of whom is 42-year-old Zou Qing. 

As head of the Beijing-based Huayunda Holdings Limited, Zou stands accused of forging documentation for 257 home-buyers to obtain false home loans from the Bank of China (BOC).  Zou stood trial on July 6 as the alleged mastermind of this loan fraud totaling 750 million yuan (US＄ 94 million) and is also thought to have obtained fraudulent loans from other banks for at least 2 billion yuan (US＄250 million).

Analysts say Zou's scheme has exposed the loose risk management mechanism of Chinese banks. Yet, Zou was merely the front man for Huo Haiyin and Yu Jiansan, two branch heads at the Beijing City Co-operative Bank. From 1994 to 1999, the duo ordered the bank to grant 890 million yuan (US＄111.3 million) to Huayunda.

Zuo began to manage the project on his own only after Huo and Yu were arrested on charges of corporate fund embezzlement, which were apparently unrelated to the either Huayunda or the Senhao project. Yu was later sentenced to six years in prison, and Huo was sentenced to death for embezzling more than 1.1 billion yuan (US＄137.5million) and incurring a loss of more than 2 billion yuan (US＄250 million) for his employer. Huo’s subsequent appeal of the ruling is still pending.  

After becoming the program manager, Zou then proceeded to use 257 copies of fake home-buyer information to obtain 640 million yuan (US＄80million) in false loans from the Bank of China’s Beijing Branch.  His did so by inflating project prices in order to obtain as many bank loans as possible.

'The higher house prices are, the more loans the developer can get from the bank,' says a banking insider.  It seems that the loans were all given within 5 days of the sale of the project. 'What should be cast into doubt is… why the bank ha[d] issued the loans so quickly,' said Lu Lei, a banking analyst. 'Where is the internal risk control mechanism of the bank?'

The Bank of China does have a four-step loan approval procedure, but it had failed to prevent Zou from using false documents to get the loans. Still, Analysts say the procedure was not seriously abided by, which then allowed for Zou’s fraudulent maneuver. It was later discovered that Xu Weilian, deputy head of the BOC Beijing branch, was responsible for issuing the problematic loans. Xu was arrested and stood trial together with Zou in July.

Despite the fact that he had used the Senhao project to defraud the banks of billions of yuan, Zou nearly escaped punishment. The banks had been prepared in 2003 to add the insolvent Senhao loans to its uncollectable loans package created for sale to asset management companies, but the central government ordered that fraudulence in those loan cases must be investigated.

'He [would] continue to play [this] game with the banks if not for the pressure from the top,' said an insider close to Zou.  In fact, a investigation shows that Zou had used most of the colossal amounts of loans he obtained from the banks for investment in new real estate projects, so that he could use them as a guarantee for more bank loans. The vicious cycle would have continued spinning had authorities not caught up with Zou. 

Zou's story, analysts say, is a reflection of the dire reality facing China's banking sector. In gigantic frauds like the Senhao case, the banks have become a co-conspirator with real estate developers and thus have acquiesced on the issue of their capital fraudulence. Since 1999, several major loan fraud cases have been discovered, in which fake house mortgages were being used to obtain large amounts of loans from banks. These have helped bring to light the subtle mismanagement of Chinese banks.

As Zou's case has shown, banks can readily detect fake housing mortgages if only they faithfully abided by their own loan approval procedures. However, banks may intentionally turned a blind eye to the developers' tricks because as house prices rise, the value of the mortgaged houses increase, thus ultimately making the bank loans safer.

Analysts say the state banks’ loose loan-granting practices have exposed them to huge financial risks. If the real estate market cools down, experts warn that it may lead to a fresh round of snowballing bad loans and banking crises.

The current housing boom is similar to that of the 1993-96 period. Although China managed to make a soft-landing in late 1990s, that period of real estate prosperity forced the country to pay a heavy price. One consequence was the dramatic increase in the amount of bad loans. China ultimately had to write off 1.4 trillion yuan (US＄175 billion) in non-performing loans from its State commercial banks.

Analysts say that policy-makers must properly regulate the banking industry to prevent it from sparking a financial crisis. Still, they admit, if they are determined to rein in real estate investment, it remains unclear whether investors will continue to toe the line.

English version by Xin Zhiming