SinoInsight 1
June 29
1. The Bank of Nanjing announced that Lin Jingran, the director and president of the bank, had been “reappointed” to another position “due to work necessities.” Lin’s duties as president were temporarily reassigned to Bank of Nanjing chairman Hu Shengrong. The next day, mainland media reported that Bank of Nanjing had accepted Lin’s immediate resignation, and he was now serving as vice chairman and Party Committee member of Nanjing Southeast State-owned Assets Investment Group.
Lin Jingran (age 48) was a career bank official, working in the Bank of China (1995 to 2005), China Minsheng Bank (2005 to May 2020), and the Bank of Nanjing (May 2020 to June 2022), according to publicly available information. Lin was Party secretary and president of the Nanjing branch of China Minsheng Bank before he transferred to the Bank of Nanjing to serve as president.
The Bank of Nanjing had 10.007 billion yuan in registered capital, 1.88 trillion yuan in assets, total deposits exceeding 1.21 trillion yuan, and over 873.5 billion yuan in total loans as of the end of the first quarter of 2022, according to the bank’s official website. The bank also had net profits in excess of 5 billion yuan and an operating income of more than 12.2 billion yuan in the first quarter of the year. The Bank of Nanjing presently has 17 branches and 218 business outlets. The bank’s website claims that it ranked 109th and 98th respectively in British magazine The Banker’s list of top 1,000 global banks and top 500 global banking brands, and ranked 21st in the China Banking Association’s list of top 100 Chinese banks.
Meanwhile, the Nanjing Southeast State-owned Assets Investment Group had total assets of nearly 190 billion yuan and net assets of about 62 billion yuan as of the end of 2021, or about 10 percent of the Bank of Nanjing’s assets, according to mainland media reports.
2. Deng Zhiyi, the executive director and president of China Orient Asset Management, was seconded to Nanjing City to serve as deputy mayor. According to mainland media reports, Deng was handed the following main responsibilities:
- Assist in the work of investment promotion, finance, and the disposal of financial risks.
- Assist in the municipal’s major financial risk prevention and resolution command center, municipal investment promotion bureau, municipal local financial supervision and administration bureau (municipal financial work office), the Nanjing Zijin Investment Group, the Bank of Nanjing, and Nanjing Securities.
- Assist in contacting financial, insurance, and securities institutions in Nanjing.
Deng (57) previously served as director of the Shanxi Banking Regulatory Bureau (Dec. 2007 to Nov. 2014), director of the Hubei Banking Regulatory Bureau (Nov. 2014 to July 2015), and director of the trust department in the China Banking and Insurance Regulatory Commission (July 2015 to Aug. 2018). In Aug. 2018, Deng was transferred to China Orient Asset Management to serve as deputy secretary of the company’s Party Committee, executive director, and president.
China Orient Asset Management is one of four major state-owned non-performing asset management companies in the PRC. The company is a central financial enterprise jointly established by the Ministry of Finance and the National Council for Social Security Fund. China Orient Asset Management has managed and disposed of 2 trillion yuan in various non-performing assets, and had consolidated assets of about 1.2 trillion yuan at the end of 2021.
June 30
1. Bank of Nanjing’s stocks plummeted, triggering a trading halt at one point and closing down 6.46 percent, or an evaporation of over 7.4 billion yuan in market value. “Bank of Nanjing” also trended on Weibo.
2. Fu Mingfei, a communications industry analyst at Western Securities, blew the whistle on the Bank of Nanjing’s financial risks in a WeChat group on the evening of June 30. Fu said that the bank has become so heavily indebted that even the provincial government is “alarmed” at the situation. He added that the bank’s debt crisis is not due to trouble with institutional investments but because the Bank of Nanjing had been helping the local government with its debt problems. Fu also noted that there would be “shocks” in the Jiangsu officialdom if the Bank of Nanjing case is not handled well.
Fu further analyzed that the Bank of Nanjing’s core assets are not depositors, but pensions, social security, and provident funds. The bank’s loans to the public sector are mainly real estate credit and credit for industrial funds and government projects, while the bank only has a few billion in capital surplus (additional paid-in capital). He added that the Bank of Nanjing may have to declare bankruptcy if its debt crisis is triggered.
The next day, Fu’s analysis of the Bank of Nanjing’s financial risks in his WeChat group made the rounds on social media and spurred market speculation. Subsequently, Fu issued an urgent apology for his analysis in his WeChat group.
Late at night on July 1, the Bank of Nanjing announced that Fu’s analysis was “malicious rumors” and had reported them to public security organs. On July 2, Western Securities said that it had held Fu Mingfei accountable over “compliance” issues and had terminated his contract with the company signed on Feb. 18, 2022.
July 1
1. The Bank of Nanjing announced that it was using a new bank seal from that day on because the original seal had suffered “serious wear-and-tear” over its long service. The name of the seal will remain unchanged as “Bank of Nanjing Co. Ltd.” (南京銀行股份有限公司).
2. In the evening of July 1, the Bank of Nanjing announced the results of its convertible debt-to-equity conversation and share changes (關於可轉債轉股結果暨股份變動公告). The announcement noted that Bank of Nanjing shareholders BNP Paribas, Nanjing Xingang High-Tech, and the Jiangsu branch of China Tobacco General Company had increased their shares in the bank by 290 million shares through debt-to-equity swaps between April 1, 2022 to June 30, 2022. The 290 million shares was 2.8997 percent of the Bank of Nanjing’s total shares before the debt-to-equity conversion.
The announcement also noted that the Bank of Nanjing’s convertible bonds held by BNP Paribas and the Jiangsu branch of China Tobacco General Company have been fully converted.
July 3
1. The Bank of Nanjing released its 2022 semi-annual performance report in the evening. The report showed that the bank’s operating income increased 16.28 percent from a year ago to 23.532 billion yuan in the first half of the year. Net profits attributable to shareholders of listed companies increased 20.06 percent year-on-year to 10.15 billion yuan. Meanwhile, basic earnings per share increased 20.24 percent year-on-year to 1.01 yuan.
The Bank of Nanjing’s seemingly positive performance report did not stop its shares from sliding. The bank’s share price fell another 1.07 percent to 10.18 yuan per share at the close on July 4 (9.86 yuan per share at the lowest), and down about 15 percent from its peak this year on April 22 of 11.98 yuan per share.
2. The Xuanwu branch of the Nanjing Public Security Bureau announced that a netizen surnamed Fu (male, age 39) had published “false information” about the Bank of Nanjing in a WeChat group “for the purpose of gaining attention” and had “caused adverse effects.” The announcement added that Fu “took initiative” after the incident to “eliminate the impact” of his “false information,” and had “admitted to his mistakes and repented.” The public security organ then imposed public security management penalties on him “in accordance with the law.”
OUR TAKE
The troubling developments at the Bank of Nanjing are the latest sign that systemic financial risks of small- and medium-sized banks in China are being triggered, a phenomenon that we earlier warned about. The bank’s troubles also appear to be partly the result of financial contagion from China Evergrande’s debt crisis, another phenomenon that we previously noted on several occasions. The CCP authorities have since stepped in to get a handle on the issue and sacrificed scapegoats to cover up financial risks.
1. The recent personnel reshuffles in Nanjing are a clear sign that what is happening with the Bank of Nanjing is not trivial.
In the case of former Bank of Nanjing director and president Lin Jingran, it is highly irregular that he was suddenly transferred out from a leading local small- and medium-sized bank with over 1 trillion yuan in assets to take up deputy leader positions in a state-owned enterprise with just 10 percent of his former workplace’s assets. Lin’s abrupt transfer indicates that he has been demoted and is at risk of being formally investigated and dismissed.
The temporary transfer of Deng Zhiyi to Nanjing to serve as deputy mayor in charge of major financial risk prevention and resolution, disposing financial risks, and assisting with the Bank of Nanjing, and other financial work-related portfolios, is also suspect. Coming from China Orient Asset Management, Deng would be experienced in dealing with non-performing assets, and his expertise could be required at the Bank of Nanjing in particular and Nanjing City in general because there are likely serious debt problems there.
2. The CCP authorities and propaganda outlets sought to blame the sharp sell-off of Bank of Nanjing stocks on former Western Securities analyst Fu Mingfei’s so-called “malicious rumors” on WeChat. However, Fu’s “rumors” at least had no bearing on the June 30 sell-off because his remarks were made in the evening after the markets had closed and the bank’s stocks had already plummeted by 6.46 percent.
The markets remained pessimistic about the Bank of Nanjing even after the authorities punished Fu Mingfei and the bank released a “positive” semi-annual performance report. This indicates that investors do not believe the official narrative on the Bank of Nanjing and are increasingly wary of the financial risks of small- and medium-sized banks in the near term.
3. Market pessimism about the Bank of Nanjing and citizen efforts to sound the alarm about trouble at the bank are not groundless.
Various debt problems
The CCP authorities have been stimulating the economy by expanding credit over the past decade, and particularly in the real estate sector. Credit expansion, however, dangerously inflated the property bubble and sped up the financialization of the Chinese economy at the expense of the real economy. In December 2020, China Banking and Insurance Regulatory Commission chairman Guo Shuqing warned in an article titled, “Improving the Modern Financial Supervision System” (完善現代金融監管體系) that real estate-related loans account for 39 percent of banking sector loans. Guo also noted that a large number of bonds, equities, trusts, and other funds have entered the real estate industry, and property is “the biggest ‘gray rhino’ in terms of financial risks in China at this stage.”
During Xi Jinping’s second term, Beijing stepped up deleveraging measures to rein in the property bubble, avert a debt crisis, and avoid financial contagion. Yet Beijing’s efforts at derisking also meant that property developers and local governments were hampered (notably the “three red lines”) from issuing new debts to pay off old debts (借新還舊), a situation that triggered the real estate debt crisis in 2021 and the spreading of financial contagion.
The Bank of Nanjing appears to be a victim of financial contagion. Former Western Securities analyst Fu Mingfei observed that the bank is in trouble because it aided the local government with its debt problems. Fu also noted that real estate credit and credit for industrial funds and government projects make up the bulk of the bank’s public sector loans. Local governments are known for relying on local small- and medium-sized banks for financing, but will look to keep rolling over debt and avoid making repayments where possible.
The Bank of Nanjing likely found itself under pressure when problems arose with one of its key businesses. The bank has served as an agent of bond settlement for more than a decade and has a reputation as a “bond specialty bank” (債券特色銀行). During the period of credit expansion and economic growth, the Bank of Nanjing’s bond business correspondingly developed rapidly. As of 2021, the bank’s interest income from bond investments was 12.534 billion yuan (up 19.44 percent year-on-year), or 15.97 percent of its revenue. The bank’s interest income from bond investments also ranked third after interest income from loans and funding operations. With the real estate sector debt crisis and China’s economic deterioration becoming more noticeable, and as the local government and property developers struggle to make bond repayments and borrow less, the bank’s implicit risks are at risk of being more fully exposed.
The Bank of Nanjing’s recent debt-to-equity swap operations appears to be a symptom of severe financial difficulties. The CCP authorities have been known to use debt-to-equity swaps to resolve or delay debt crises. For example, the authorities proposed that China Evergrande undertake debt-to-equity swaps as a way to tackle its 130 billion yuan debt crisis that was triggered in September 2020.
Helping the local government resolve the problems of debt-strapped companies also seems to have contributed to the Bank of Nanjing’s current problems. Suning Appliance Group, which was involved in a 20 billion yuan debt-to-equity swap with Evergrande in 2020, had to continuously transfer equity to state-owned enterprises because it was also suffering a debt crisis. In March 2020, Suning Consumption Finance, a subsidiary of Suning Appliance Group, had to sell 39 percent of its shares, of which 36 percent went to the Bank of Nanjing for 340 million yuan.
Evergrande
According to mainland media reports, the Bank of Nanjing’s problems is linked to financial contagion stemming from the Evergrande debt crisis. The reports cite “market rumors” as claiming that Evergrande’s default on projects belonging to the “Fullshare system” (豐盛系), or companies under the Chinese conglomerate and investment company Fullshare Holdings, was the straw that broke the camel’s back for the Bank of Nanjing. The reports also note the bank and government urban investment enterprises are tangled in the “Fullshare system,” and the Nanjing local government is very dependent on land sales for revenue.
Mainland media reported that Fullshare Holdings’ debt crisis was triggered around Dec. 26, 2018 when it was unable to make repayments on 1.28 billion yuan in loans. Some mainland media reports said that the Nanjing municipal government’s urban investment platform had helped Fullshare with its overdue loans at the time.
In 2019, the “Fullshare system’s” debt crisis erupted in full, impacting its guarantors. According to Caixin, Nanjing Xingang (南京新港), a local urban investment platform, was a “secret guarantor” of the “Fullshare system,” and was liable for 4.5 billion yuan of the latter’s debts. Nanjing Xingang is a major shareholder of Nanjing Xingang High-Tech, and Nanjing Xingang High-Tech is the Bank of Nanjing’s third-largest shareholder with a 9.75 percent stake.
In the second half of 2021, China Evergrande’s debt crisis was triggered and some of its projects were suspended due to outstanding payments to suppliers. Evergrande’s troubles saw Fullshare Holdings confirm an impairment loss of 1.363 billion yuan on its investment in an Evergrande affiliate at the end of 2021, and this directly expanded Fullshare’s profit losses to 2.685 billion yuan.
On paper, the Evergrande and Fullshare crises do not appear to have much of an impact on the Bank of Nanjing. The bank’s 2021 annual report listed loans to the public real estate industry at just 37.4 billion yuan, or 6.88 percent of total loans to the public sector (of which 0.08 percent are non-performing). Moreover, loans to the construction industry amounted to 15.372 billion yuan, or 2.83 percent of public sector loans (of which 4.6 percent are non-performing).
It is an open secret, however, that financial institutions in the PRC will find ways to bypass government supervision and channel funds to property developers. The Xi leadership has attempted to curb the practice with Xi Jinping stating that “houses are for living in, not for speculation,” and introducing several measures to restrict financial institutions from providing funding to the real estate sector. The banking and insurance regulatory authorities also issued 146 “housing related” fines worth 62.85 million yuan to various financial institutions between January to May 2022. Yet “the top has policies, but the bottom has countermeasures” (上有政策, 下有對策), and Beijing is unlikely to be completely successful in preventing financial institutions from illegally funding property developers as long as the latter can get away with it.
Assuming that the “market rumors” carried by mainland media reports are accurate, then the Bank of Nanjing’s finances are likely far more deeply intertwined with Evergrande, Fullshare, local urban investment platforms, and local property enterprises than its public reports indicate. And if so, then Fu Mingfei’s observation that the bank may have to declare bankruptcy is not unfounded.
History of violations
The Xi leadership commenced with financial sector “rectification” in 2017 and proceeded to investigate and punish many Chinese financial institutions and their executives for illegal operations. The Bank of Nanjing and its executives were also caught up in the regulatory storm.
On Feb. 15, 2019, the Nanjing Municipal Commission for Discipline Inspection announced a probe into three Bank of Nanjing senior executives for their involvement in the transfer of interests in the bond market. Of the three, Dai Juan, the general manager of the bank’s asset management business center, was popularly referred to as the “leading sister of the bond market” (債市一姐) due to her experience and expertise. There is currently no publicly available information on the fate of the three executives.
In compiling statistics, mainland media outlets found that the Bank of Nanjing, its branches, and its subsidiaries received 46 fines worth 69.5668 million yuan between 2017 to 2020. Most of the fines were related to credit violations in the field of consumer finance.
On Jan. 4, 2021, the CCP authorities fined the Bank of Nanjing for illegally appropriating funds and confiscated 7.5687 million yuan from the bank.
The Bank of Nanjing’s history of violations suggests that it is not above engaging in risky business that in turn may have resulted in a crisis that is currently bubbling to the surface.
Broader small- and medium-sized bank risks
The trouble with rural banks in Henan that emerged in April and now the Bank of Nanjing appear to be the tip of the iceberg of serious systemic and financial risks with small- and medium-sized banks in China. Other small- and medium-sized banks could soon be found to be facing similar problems, particularly as financial contagion from Evergrande’s debt crisis spreads further and the Chinese economy markedly deteriorates.
The problems involving small- and medium-sized banks have become a hot topic of discussion on the Chinese internet and social media. Netizens ponder the safety of their deposits and many are considering moving their money to large state-owned banks.
Some bank employees have also begun exposing disturbing issues about their financial institution on the internet. For instance, a recent (June 26) response by a netizen claiming to be a bank staff to a Zhihu (a Quora-like Q&A forum) topic titled, “Why Does it Always Feel Like the End of the World Lately? Do You Guys Feel the Same Way?” (為什麼最近總有世界末日的感覺? 你們也有這種感覺嗎?) garnered over 10,500 “likes” at the time of writing. The topic itself had nearly 4.5 million views.
The netizen said they transferred to an unnamed bank’s loan approval office and had been busy with various inspections, consultations, and reports meant to provide accountability to supervisory authorities over the past month. “Each of these reports made me bite my pencil and break into cold sweat. If I write the real situation, the [bank’s] executives will be interviewed at any moment; I don’t dare to describe it here, it’s too difficult,” the netizen wrote.
The netizen added, “It is commonplace [at the bank] to see loans not being used for what they were applied for [用途不實], shell companies, disputed ownership, and under-collateralization; only a mere fraction [of loans] can be recovered, and the vast majority of [loans] are ‘short-term, long-use’ [短貸長用, i.e. issuing new loans to pay off old debts], like a rolling snowball. All technological means have been used to avoid concentrated exposure of risks; [the credit status of clients whose] principal and interest [on loans] have not been paid was directly changed from subprime to prime in the system. What an eye-opener for me again.”
The netizen also noted that the bank is presently unable to lend out home mortgages. Further, foreclosures are on the rise but most are unsuccessful. The netizen wrote, “It is hard to imagine what’s going to happen to the bank and depositors following a large-scale failure … Recently there was an incident with rural banks [a reference to troubled banks in Henan] that triggered a major investigation of the industry. Fortunately our bank didn’t do [what the rural banks had done], but [what the rural banks did] is not rare.”
SinoInsight 2
July 5
Local official media outlet Hebei Daily reported that Liu Wenxi, Hebei Province’s new deputy governor and provincial public security bureau director, had passed away after a “sudden illness and failed rescue attempt,” according to the local authorities. The report did not elaborate on the nature of Liu’s illness.
July 6
Pro-CCP Hong Kong media Sing Tao Daily reported that Zhao Ge, a member of the Hebei Provincial Party Committee and secretary of the provincial Political and Legal Affairs Commission, had died of illness in May. This news, however, was not reported in official mainland media.
Zhao Ge (age 52) served in Heilongjiang Province for the bulk of his career (Aug. 1992 to Dec. 2019), eventually becoming a Standing Committee member and secretary-general of the Harbin Municipal Party Committee. Zhao was subsequently transferred to Hebei Province where he enjoyed smooth career progression. From December 2019 to August 2020, Zhao Ge served as deputy Party secretary of Langfang City, acting mayor, and mayor. Nine months later, Zhao was promoted to Party secretary of Hengshui City (Aug. 2020 to Nov. 2021). In less than two years, Zhao would be promoted again to become a member of the Hebei Provincial Party Committee and secretary of the provincial Political and Legal Affairs Commission (Nov. 2021 to present; deputy ministerial rank). Zhao had no work experience in the political and legal affairs apparatus prior to his promotion.
From publicly available information, Zhao Ke’s last public appearance was on Jan. 28, 2022 when he attended a summary meeting on the education and rectification of political and legal affairs teams in Hebei Province.
OUR TAKE
The death of two leading political and legal affairs cadres in Hebei not long after coming to their position is noteworthy in light of the Tangshan restaurant incident and the Xi leadership’s struggles to “rectify” the Hebei political and legal affairs apparatus.
Both Liu Wenxi and Zhao Ge reportedly died of illness. The illness explanation seems more plausible in Zhao’s case because he did not make any public appearances for over four months since this January. Zhao was also reportedly suffering from throat cancer and advanced-stage lung cancer in 2021 while he was Party secretary of Hengshui City, according to some Chinese dissidents.
However, the death of the relatively young Liu (54) barely two months into his tenure as Hebei public security head is suspicious, particularly with the Hebei political and legal affairs apparatus coming under scrutiny over the Tangshan incident and its longtime domination by the Jiang Zemin faction. As we previously analyzed, Liu, Zhao Ge, and Tangshan public security director Zhao Jinjin appear to have been put in position by the Xi leadership to “rectify” the Hebei political and legal affairs apparatus, as well as root out local official-business-triad collusion. We also noted that the Xi leadership could have taken advantage of the Tangshan incident to make inroads into clamping down on triads and corrupt public security officials. Thus far, at least six public security officials in Tangshan (including a district chief, deputy chiefs, station chief, and police officers) have been investigated over the restaurant incident, and a wave of whistleblowers has emerged to out local gangsters.
If Xi’s factional rivals still exert influence over the Hebei political and legal affairs apparatus or if the latter is disloyal to the Xi leadership for other reasons, then the Xi leadership could naturally expect pushback over the Tangshan incident. Already, there are cases in Tangshan where whistleblowers, instead of having their complaints received, were arrested by the police over concerns of “stability maintenance.” It cannot be ruled out that there was foul play involved in the sudden death of Liu Wenxi shortly after he took office. If Liu had indeed died from abnormal causes, then it would be an indicator of the strong resistance the Xi leadership faces in attempting to “rectify” the Hebei political and legal affairs apparatus.
The Xi leadership does not just have problems in Hebei. A recent development in the high-profile “Shaanxi 100 Billion Mining Case” (陝西千億礦權案) suggests that the political and legal affairs apparatus is still resisting Xi Jinping strongly in some quarters. On May 7, Wang Linqing, the former Supreme People’s Court assistant judge who exposed Supreme People’s Court president and Jiang faction member Zhou Qiang for manipulating the outcome of the “Shaanxi 100 Billion Mining Case” in late 2018, was sentenced to 14 years in prison for allegedly obtaining state secrets illegally and accepting bribes.
Previously, in a televised “self-confession” on state broadcaster CCTV on Feb. 2019, Wang Linqing said that he was giving the exclusive interview partly to “vent anger,” partly “as a moment of impulse,” and partly to “prevent others from handling [the “Shaanxi 100 Billion Mining Case”].” Meanwhile, Deutsche Welle reported in October 2020 that Wang was suffering from near blindness in his left eye, severe hearing loss in his right ear, and severe damage to his waist and prostate—injuries that were likely sustained during torture while in detention.
