Poor supervision has led to the loss of billions of yuan, says He Jun
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Recently, news spread regarding the suicide of Zhong Xiaolong, the former head of the Shandong branch of China Development Bank (CDB). According to the Beijing-based financial and business news site Caixin, Zhong Xiaolong was discovered in his room in Beijing with his wrists slit on July 17. Zhong was taken to a hospital by his family where he died later that evening. Caixin quoted a knowledgeable source that in addition to the slit wrists, Zhong had also stabbed himself in the chest.
Zhong, 54, began serving as the head of CDB’s Shandong Branch on June 20, 2016. It is understood that the suicide of Zhong is related to the investigation of Chen Xiaobo, former head of the markets and investment division at the bank’s headquarters in Beijing.
In 2017 Chen was transferred from the bank to an economic development unit affiliated with the Communist Youth League of China. He was taken away several weeks ago as part of an investigation. Chen had also previously served as deputy mayor in Wuwei City in Gansu province, and was familiar with Huo Ronggui, the former Secretary of the Wuwei Municipal Party Committee in Gansu province.
On July 18, 2019, Huo was publicly tried in the First Intermediate People’s Court of Dingxi City, Gansu province for bribery, misappropriation of public funds, and abuse of power. The investigation on Chen Xiaobo has revealed the case that CDB’s Jilin Branch’s illegal loan guarantee transactions had caused losses of more than RMB 3 billion over the span of many years and was even suspected of illegal interest transfers.
As a result, the CDB had multiple people investigated, including the former CDB head office’s president of the Credit Review Department, and relevant persons from the Shandong and Jilin CDB branches. Zhong was the former deputy governor of CDB’s Jilin Branch.
According to the information disclosed to Caixin, the issue of violations by the Jilin branch had been revealed from within CDB during the period of the former chairman of the board of directors, because CBD had never had such a serious case of violation of guarantees. During the second term of the chairmanship, the head office did not issue a single word of criticism, and there was no internal notification on this matter. The screening only occurred after the head office changed its leadership. In addition, the case of the billion-yuan illegal guarantee of CDB’s Jilin branch also involved incumbent officials and those who no longer hold their bank positions.
There have been quite a number of cases involving corruption of CDB’s top leadership in recent years. A search of public information is expected to reveal that several heads of provincial branches have been dismissed within the past two years. In February 2019, the Central Commission for Discipline Inspection revealed that Guo Lin, a former member of CDB’s administrative committee, was found to have seriously violated integrity rules during his time as head of the bank’s Tianjin branch. Guo did not pay private contractors who renovated the bank’s office building for renovations to his own home and sold his home to a bank loan client at a price that was clearly above market value. Because of that matter, he was expelled from China’s Communist Party, in addition to being fined and having his retirement benefits revoked.
In January 2019, China Judgments Online published two rulings revealing a corruption case at CDB’s Guangdong branch. Wu Deli, born in 1956 and the former head of CDB’s Guangdong branch, had used his position to facilitate the interests of related companies, and instructed his son Wu Hao to accept other people’s property and equity for more than RMB 23 million. Wu served as the director of CDB’s asset restructuring and protection department, as well as head of the Chongqing branch. He later served as CDB’s Guangdong party secretary and head of the CDB Guangdong branch. He was involved in corruption cases with China Huayang Economic and Trade Group and Logan Group where he was said to have accepted bribes in matters regarding to loans and debt financing from these two enterprises.
On January 22, 2019, China Economic Net quoted disclosure of public information from the China Banking and Insurance Regulatory Commission (CBIRC) that CDB’s Henan branch had committed violations such as negligence and carelessness in their contract signing and guarantee confirmation processes, where the bank issued loans prior to implementing collateral guarantee measures, in addition to lacking in post-loan management and inadequate risk management measures. Four relevant persons, including CDB’s Henan branch head Wang Weijun were penalised as a result.
As the largest policy bank in China, CDB has had several cases of corruption and legal violations happening at branch level in recent years. Apart from personal reasons of the corrupt personnel and considering internal management factors, the common causes and mechanisms of policy bank corruption cases are something worth thinking about. Unlike commercial banks, policy banks are in charge of policy financial resources, relying on state credits, and their financing is based on credit bond issuance. Such banks also serve the national policy goal while following non-market principles. For instance, the development finance initiated by CDB is non market-oriented. The business targets of these banks are also mostly government and government-related enterprises. The credit period provided by policy banks is far beyond the loan period of commercial banks, and the credit scale often get as high as several billion to 10 billion RMB.
Objectively speaking, under such a background, the financial services of policy banks will have difficulty in conducting risk supervision like commercial banks do, even if the level of risk control of Chinese commercial banks is not that high. Hence, policy banks in China enjoy more room for “leniency” and have non-marketing features, as well as more hidden risk management “dead ends”. Because of different positioning and objectives, there is often a larger “negotiation” space in the actual business development of policy banks. When all local governments are striving to seek financial resources for development, these spaces can easily become “rent-seeking” spaces.
In the process of China’s economic development, regardless of whether the macro policy is loose or cautious, most of the time the financial resources are still scarce in the context of multiple obstructions in the market. This makes policy banks with special policy financial resources the target of multi-party lobbying. In the Chinese market, there are often rumours about how CDB executives are regarded as special guests by local governments, and even feared by the leaders of local provincial party committees and provincial governments. The root cause of this is that the non-marketing financial resources controlled by policy banks are what local governments vie for.
The turning of tides facing several provincial-level branch heads is not a simple isolated incident. It actually reflects the institutional and mechanism-based issues hidden behind the policy-based financial system. In fact, in a market full of marketisation and rule of law, policy finance is a kind of exception. It cannot be too huge and the proportion it takes cannot be too high. Yet if one sees this in an objective manner, in a socialist market economy with Chinese characteristics, policy finance will exist for a long time in the context of the long-standing existence of the “administrative economy”. However, precisely because of its non-marketing characteristics, it also causes the supervision of policy financial institutions to become a challenge.
Final analysis conclusion
What has happened to the many CDB branch heads cannot be regarded as purely incidental. This is actually an indication of problems in the policy-natured financial system. The Chinese government’s goal-oriented and “administrative economy” system too easily generate rivalries in contesting for policy-oriented financial resources and evolving into rent-seeking behaviour for competitive policy-based financial resources.
He Jun is a master in the Institute for the History of Natural Sciences, Chinese Academy of Sciences, majoring in the intellectual history of science and is a senior researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Anbound was established in 1993 and specialises in public policy research