Risk Watch: Shanghai Pudong Development Bank Branch Fined $72 Million

On Jan. 19, the China Banking Regulatory Commission (CBRC) announced that the Chengdu branch of Shanghai Pudong Development Bank had issued irregular loans. The Sichuan bureau of the CBRC fined the bank branch 462 million yuan (about $72 million) for its violation.

The CBRC considered the Shanghai Pudong Development Bank case to be severe:
1. The case involved illegal transactions of up to 77.5 billion yuan.

2. Shanghai Pudong Development Bank Chengdu branch president, two vice presidents, department chief and sub-branch president were fined, saw their senior management qualifications canceled, and were banned for life from working in the financial industry.

3. Bank branch president Wang Bing was also subjected to “shuangkai,” a Chinese term meaning job termination and expulsion from the Chinese Communist Party.

4. All 195 mid-level managers from the Chengdu branch were subjected to internal questioning and were rotated to different posts.

The backdrop: The Shanghai Pudong Development Bank case was first exposed in April 2017. The bank’s Chengdu branch was found to have offered credit worth 77.5 billion yuan using illegal means to 1,493 shell companies to cover up its bad loans. The move resulted in bad assets worth nearly 10 billion yuan.

Previously, the bank branch’s hidden irregular operations allowed it to project an image of healthy finances.

Our take:
1. The Shanghai Pudong Development Bank case is very likely only the tip of the iceberg of China’s financial sector woes. The CBRC’s Jan. 13 circular on “further deepening reform” of the banking sector’s “chaos” hints at very severe problems. Expect more and bigger cases of financial wrongdoing to surface in 2018 as the Xi Jinping administration cleans house.

2. In November 2017, Beijing announced the opening up of its financial sector to foreign investors. Investors, however, may struggle to discern if China’s financial market liberalization is risk or opportunity given the messiness of the Chinese financial sector and opaque information.