Credit vetting is the new buzzword in China. Even the Beijing municipal government published a black list last month as the scale of fraud and repayment evasion inexorably rises. With a liberated business press playing an important role, more and more outrageous scams are coming to light, revealing the ease with which white-collar criminals can milk Chinese banks of millions of yuan.
The Shenzhen City intermediate level people's court started to hear the fraud case involving Shenzhen Taiming Enterprises in August this year. Between 1995 and 1999 two brothers, Peng Haihuai and Gu Haisheng, set up 27 shell companies and opened 89 letters of credit with Shenzhen Development Bank and China's largest bank, the Industrial and Commercial Bank of China, bilking the two banks out of a combined Rmb570 million ($70 million.)
Listed company, Yincheng Guangxia, the herbal remedies company whose false financial disclosures were revealed in Caijing Magazine last year, collapsed owing its creditors, Bank of Communications, Pudong Development Bank, ICBC and Bank of China, Rmb1.2 billion. The case began in August with the creditors demanding full repayment plus interest.
Of course, there's little likelihood these shattered companies will be able to pay anything back. From the start, they falsified their accounts and lied their way onto the stock market in order to squeeze funds out of China's easily manipulated stock markets. Part of the blame rests with the banks. The internal vetting system of the state banks in particular revolves around checking the amount of deposits branch offices have managed to accumulate. Credit checking is given less of a priority, partly because the tools and training are not in place, and partly because of the banking tradition of giving loans on personal connections. A further reason is that as companies benefit from increasing channels for raising capital in the form of convertible bon and share issues, their reliance on bank loans has diminished. This has meant ever-fiercer competition between the banks to lend out funds.
In view of the high levels of non-performing loans already on the banks' books, the PBOC is increasingly concerned that fraudulently obtained loans are not added to the historical burden of policy loans, many of which have turned bad. China's state-owned commercial banks are estimated to have bad loans of at least 25% and up to 40% of their total assets.
The PBOC has decided therefore that prevention is better than cure, and industry sources reveal the central bank is preparing to issue an advisory document on how to banks can cope with the threat of increasing bad loans.
The suggestions follow a push started in April last year, when the government announced that credit fraud would be a high priority target and that the country's banks should join the struggle. This campaign focused on the law enforcement organs working together to bring offenders to court in a speedy and draconian manner - but it did not prevent the problem loans from occurring in the firstplace.
Part of the problem, say local analysts, is that there is an asymmetry in the information available to the banks. The companies they deal with have opaque and uncentralized assets, making it difficult to get an overall picture of the state of the group. And given the infant status of China's accounting industry, it's also very difficult for a credit manager to check whether the statements made by the prospective debtor are correct. The banks have tended to shortcut the issue of credit worthiness by focusing on companies whose sheer size and number of easily-mortgageable assets makes them seem a good risk. The collapse of even the largest companies, both in the US and in China, shows that is not necessarily a reliable benchmark.
The banks have also relied on the "danbao" or guarantee system, whereby the parent company or another company vouches for the companies seeking a loan. However, according to industry sources, the PBOC has discovered that a number of companies are created solely to serve as guarantors for the loans. Even though they have all the necessary papers, they have neither managers, genuine addresses, or much in the way of assets.
In its proposal, the PBOC has suggested that credit information and authority be centralized at the bank's headquarters. This avoids a local branch, under often only under tenuous supervision from the centre, favouring certain companies with an excessive amount of loans. It has also suggested the creation of a black list so that banks can share information on clients who might represent a credit risk.
The PBOC is also to revive its idea of a computerized public credit information system, an idea originally mooted in 1998.
The installation of such system involved sophisticated information management software and hardware. It has already been installed across 300 cities, and the plan is for it to be extended nationwide by the end of the year. The Construction Bank of China, Agricultural Bank of China and others are reportedly working on getting the system tooperate with theirs.
The existence of previous systems is part of the problem. All the banks already have what passes in their eyes for credit risk management systems, and by all accounts they are not looking forward to integrating their own fragmented platforms with the PBOC's suggested platform. And they are reluctant to share useful information on clients until the other banks have put out some information first - so it's a kind of Mexican standoff. If the quality of the information is neither timely nor accurate, as many insiders suspect will the case, the system won't work.
The enterprises consulted on the proposals are concerned that in practice any changes will lead to a more rigid and conservative lending procedure. All companies are concerned with this, but in particular the private sector companies who are starved of funds as a result of lingering official suspicion of entrepreneurs. The challenge of China's entry into the World Trade Organization means foreign firms will increasingly be able to set up shop in China, and companies are concerned that a credit crunch during that crucial period could harm their chances.
