In Depth: The High Cost of a Free Lunch for a State Financial Firm
It was a deal that sounded too good to be true. Under a 2016 accord, two subsidiaries of Shaanxi Financial Holding Group would simply guarantee a 350 million yuan ($50 million), 12-year loan to Xi’an International Trade & Logistics Park White Horse Wine Industrial Co. and in return would collect hundreds of thousands of yuan in annual fees.
White Horse Wine would use the loan from the Shaanxi branch of policy lender Export–Import Bank of China (Exim Bank) to develop a wine exchange. But the deal has since gone bad. Construction of the wine exchange has stalled, and White Horse Wine is mired in a number of loan default lawsuits, Caixin learned.
That has left Shaanxi Financial, a conglomerate owned by the Shaanxi government, on the hook for hundreds of millions of yuan of loan guarantees provided by the two subsidiaries. And while business registration records show the two units are 90% owned by Shaanxi Financial, people close to the matter said the state-owned financial company is only holding the stakes in the two companies on behalf of Zhang Wenwei, a fugitive businessman whom Shaanxi Financial has accused of fraud.
The White Horse Wine deal is only part of a tangled web of Shaanxi Financial’s transactions that have triggered probes by Chinese authorities. Investigators have detected 1.8 billion yuan of risky loans, with an additional 3 billion yuan in potential danger, sources close to the matter said. Shaanxi Financial’s exposure to suspicious loans could be even higher if nonbank borrowings are included, the sources said.
Shaanxi Financial’s predicament grew out of transactions in which it was invited to take controlling stakes in several private companies without paying a penny and instead was paid substantial fees simply for holding the stakes. In return, Shaanxi Financial offered the endorsement of a state-owned enterprise to help the companies obtain bank loans. Sources close to the matter said Shaanxi Financial received free controlling stakes worth 5.8 billion yuan in at least eight companies.
Chinese banks have long preferred state-owned companies for loans, citing higher risks associated with private businesses. Private companies thirsting for capital have pursued different means for gaining state backing for access to loans, and some offered free ownership stakes to state companies to do so. There is no law clearly barring state companies from holding stakes for others, but the practice has raised concerns about risk.
Shaanxi Financial is a case in point. The deals appeared lucrative as the company would collect the annual fees for holding the ownership stakes, enabling the private businesses to obtain access to bank loans. But then Zhang, one of the private partners, fled with borrowed money, leaving hundreds of millions of yuan of unpaid loans under the name of ventures controlled by Shaanxi Financial.
At least four Shaanxi Financial-controlled ventures are actually owned by Zhang, the fugitive businessman. The ventures borrowed 850 million yuan, including 200 million yuan that has already gone into default. Most of the money is believed to have been embezzled by Zhang, Caixin learned.
News emerged in February that Zhang, 44, fled to Australia. A person close to the matter said Zhang has contacted the Shaanxi government, Shaanxi Financial and Exim Bank Shaanxi pledging to return and repay the loans. Zhang couldn’t be reached for comment.
Most of the loans involving Shaanxi Financial’s private partners were extended by the Shaanxi branch of Exim Bank. In May, Exim Bank Shaanxi’s former President Jiang Bin was placed under graft investigation by China’s top corruption watchdog. Jiang overruled loan officers and fast-tracked credit approvals for some of the Zhang transactions, sources said. Caixin was unable to contact Jiang for comment.
Jiang, who was head of Exim Bank Shaanxi between July 2015 and January 2019, is suspected to have colluded with private companies to illegally issue loans, a person close to the management of Exim Bank Shaanxi told Caixin. About 7 billion yuan of loans issued by the bank under Jiang’s direction are considered at high risk, including those extended to Shaanxi Financial, the person said.
Souring assets have hit Exim Bank Shaanxi badly. In 2018, the bank reported a net loss of 1.6 billion yuan, compared with a net profit of 71 million yuan the previous year, according to the bank’s financial reports.
Established in 2011, Shaanxi Financial was labeled a backbone financial institution in the province with business focusing on financing guarantees and local financial exchange. Quan Yongshen, the company’s founding chairman, set an ambitious goal of developing Shaanxi Financial into a “financial services supermarket,” offering a high diversity of financial business.
However, a lack of professional ability has hampered Shaanxi Financial’s ambition, and the company has increasingly relied on easy business such as offering credit backing for private companies taking advantage of its state backing, said a person close to the company.
But as the private borrowers with its backing default, Shaanxi Financial faces mounting repayment obligations as the parent company and loan guarantor.
“It will be a bottomless hole” for Shaanxi Financial to manage, the source said.
Quan, who stepped down in late 2016, has been summoned by authorities for inquiries about loan deals during his tenure, people familiar with the matter told Caixin.
Zhang Wenwei, a fugitive businessman whom Shaanxi Financial has accused of fraud. Photo: VCG
No free lunch
Shaanxi Financial and Exim Bank Shaanxi faced unease shortly after this year’s Chinese New Year holiday in February on news that Zhang had fled to Australia. In late February, a 200 million yuan loan issued by Exim Bank Shaanxi to a company owned by Zhang turned bad, with 300 million more due in April.
The loan contract was signed in 2016 between the bank and Shaanxi Financial as a wholesale loan. Under the agreement, two Shaanxi Financial subsidiaries — Small and Medium Enterprises Financial Services Co. (SME Services) and Overseas Investment Management Co. — promised to distribute the loan to 20 small and medium-sized enterprises. Shaanxi Financial, as the parent of the two borrowers, provided a full guarantee for the loan.
Business registration records showed that both SME Services and Overseas Investment are majority-owned by Shaanxi Financial. But Caixin’s investigation found that both companies are controlled by Shaanxi Panshi Financial Holding Group Co. (Panshi Financial), a company owned by Zhang.
Public records showed that Overseas Investment was established in February 2016 with 51 million yuan of investment from Shaanxi Financial for a 51% stake, with the rest 49% held by Shaanxi Aowei Investment Management Co. (Aowei Investment), which later was renamed Panshi Financial.
But documents viewed by Caixin showed that Shaanxi Financial’s 51 million yuan investment in Overseas Investment was borrowed from Aowei Investment. Under the agreement, Shaanxi Financial was to hold the stake for Aowei Investment for three years without taking part in Overseas Investment’s business and dividend distribution. In return, Shaanxi Financial was to earn an annual fixed yield of 306,000 yuan from Overseas Investment.
A similar agreement was signed by Shaanxi Financial and Aowei Investment for the establishment of SME Services. In that deal, Shaanxi Financial earns 4 million yuan a year for holding the stake without intervening in company operations.
Aowei Investment was set up in 2012 by two individual shareholders. The company has undergone frequent shareholding changes and became Panshi Financial in November 2017, business records show. Sources close to the company told Caixin that Zhang is the actual controlling shareholder of Aowei Investment, and all other shareholders are his family members.
People familiar with him describe Zhang as a shrewd businessman. He started from scratch, they said. Business registration records showed that he is the controlling owner of 23 companies ranging from automobile to financial businesses. Zhang is in Australia running a pilot training school, his business including driving schools and car maintenance centers in China remain normal operation, Caixin learned.
An investigation by the Shaanxi banking regulator found that the 500 million yuan loan obtained by SME Services and Overseas Investment was never distributed to the small enterprises as promised. After several transactions, the money landed in personal accounts of Zhang and his relatives, including 5.6 million yuan that was sent to Australia. Part of the money was used by Zhang’s affiliated companies to repay debts, the regulator found. Investigators said the 20 small companies that applied for the loan were likely to be shell companies controlled by Zhang.
Caixin learned that Shaanxi Financial reported the case to police for investigation of fraud and filed a lawsuit against Zhang and the 20 companies. Under local government instruction, Shaanxi Financial fulfilled its guarantee to repay the 200 million yuan of loans due in February. The remaining 300 million yuan loan will be extended and restructured.
Debt risks facing Shaanxi Financial may be much bigger than the 500 million yuan loan, as the White Horse Wine case suggests, sources said. The two loan guarantor companies — Shaanxi Jinkong Taijie Financing Guarantee Co. and Silkroad Jinkong Financing Guarantee Co.— in which Shaanxi Financial holds controlling stakes that are actually owned by Zhang have few assets on their books. In addition to the loan for White Horse Wine, the two companies each guaranteed 100 million yuan of loans from Exim Bank’s Chongqing branch that have gone bad, people familiar with the matter said.
The Exim Bank’s Chongqing branch has sued the two subsidiaries for the unpaid loans, sources said. Analysts said that as the controlling shareholder, Shaanxi Financial would be ultimately held responsible for the loans.
Shaanxi Financial also holds a 56.3% stake in jkd.com, a local peer-to-peer lending site that faces a crisis over 800 million yuan of souring debt. Caixin learned that the loans involve private companies that used Shaanxi Financial’s guarantee to raise funds from public investors through jkd.com. Some of the loans have gone into default as funds were embezzled by people behind the private borrowers. Cao Jungang, a businessman whose company borrowed 64 million yuan from jkd.com, was sued by Shaanxi Financial for fraud, sources said.
The troubled debts might be only the tip of an iceberg of Shaanxi Financial’s crisis as investigators have detected risky borrowings linked to the company of more than 3 billion yuan, said a person close to the matter, adding that the actual amount could be even bigger.
To maintain its credit records and rating, it is likely that Shaanxi Financial and the provincial government will seek to avoid default of the loans by all means and eventually assume the repayment responsibility, a market analyst said.
The banker behind the deals
Most of the loans involving Shaanxi Financial and its private partners were extended by Exim Bank Shaanxi with backing of then-branch head Jiang, even though some of the projects were highly suspicious, bank sources told Caixin.
In April 2016, a staffer at Exim Bank Shaanxi who started a review of the 500 million yuan loan application of SME Services and Overseas Investment reported doubts over the qualifications of the loan applicants, such as suspicious financials and business records. The staffer suggested denying the loan to SME Services and Overseas Investment, a person close to the bank told Caixin.
But the loan officer’s finding was ignored, and the officer was transferred to other post by Jiang, the person said. Another mid-level manager who opposed the loan was also forced to leave the branch, the source said.
In August 2018, the loan application of SME Services and Overseas Investment was granted express review by the bank and won approval after one day, compared with five days for most other applications.
In April this year, Shaanxi’s provincial banking regulator initiated a two-month inspection on Exim Bank Shaanxi’s business between 2016 and 2018. Investigators concluded that the 20 small companies cited by SME Services and Overseas Investment for the 2016 loan application were indeed highly suspicious as their financials and businesses were doubtful.
“It was clearly a loan fraud, and many in the bank agreed at that time, but there was a force that push this project forward,” an Exim Bank Shaanxi employee said.
The loan to White Horse Wine was also personally pushed forward by Jiang despite opposition from other bank employees, another source told Caixin. The banking regulator’s investigation found that White Horse Wine was granted a high credit rating by Exim Bank Shaanxi even though the company had obvious default risks at the time. The loan to fund the wine exchange project was later invested in property development, despite policy restrictions.
A bank source told Caixin that a loan application at the Exim Bank needs three levels of review that are strictly separated from each other to ensure checks and balances. However, during Jiang’s tenure, different sections of the review system at the Exim Bank Shaanxi cooperated closely to ensure green lights for certain companies.
Jiang, 56, joined the Exim Bank in 2007 and was the deputy head of Exim Bank’s Chongqing branch for eight years before he was promoted to head of the Shaanxi branch in 2015. Employees said he appears mild but is high-handed in business.
He made Exim Bank Shaanxi his own empire with his allies controlling key departments to serve businessmen close to him, a bank employee said.
In January, Jiang stepped down from Exim Bank Shaanxi to become the general manager of Chongqing Import and Export Credit Guarantee Co. Four months later, he was placed under investigation by the top graft buster.
Contact reporter Han Wei (firstname.lastname@example.org)
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