Bill finance takes a hit, stock rout exposes scam
Print Edition
China’s biggest lenders have tightened procedures in bill-financing transactions after two employees at Agricultural Bank of China were reported to have stolen 3.92 billion yuan (US$596 million) in bills from the bank and resold them.
So-called bills of exchange are like promissory notes, or short-term loans, that stipulate repayment in a fixed period of time.
Even routine bill business done by banks now requires approval from a branch manager or someone even higher, 27-year-old bank account manager Zhang Lu told Shanghai Daily.
He said he had to write five separate reports to explain a bill financing transaction he conducted for a client in the car industry.
“Bills related to iron ore, coal and steel companies have been suspended, while the total quota for bill transactions has also dropped,” Zhang said.
In the case of AgBank, the nation’s third-largest lender, two employees at a Beijing branch of the bank swapped bills for newspapers. They intended to return the cash but lost the money when China’s stock market plunged, news organization Caixin reported on January 22.
The bank, which said it is cooperating with investigating authorities, called the matter a “material risk incident.” Caixin said authorities have begun a series of probes into the financial sector in the wake of last summer’s stock market crash. More recently, the market has suffered further setbacks.
In addition to China’s “big four” banks, several joint-stock banks have also temporarily halted or tightened financing business using bills of exchange, people familiar with the matter told Shanghai Daily.
The bills are a widely used form of payment, especially for smaller firms in China needing short-term loans.
According to the People’s Bank of China, bill financing in China’s interbank market reached 4.58 trillion yuan by the end of December, increasing 57 percent from a year earlier.
A clerk at Shanghai Purang Financial Technology Co, one of city’s biggest bill agencies, told Shanghai Daily that the actual scale of bill financing is about 10 times bigger than the central bank data suggest.
“Bill agencies and mid- to small-sized companies who rely on that business to make payrolls will feel the impact from the tightening-up,” the clerk said.
Agencies dealing in bills also stand to lose profits, he added.
The clerk said there are some who have rorted the system by devices such as exchanging bills for cash and investing the money in stocks or making other loans. Some of those funds entered the market as margin deposits, he said. Margin trading — or buying stock with borrowed money — was cited as a major contributor to last year’s stock market collapse.
Frauds of such kind was also uncovered by China CITIC Bank last Thursday, as the lender confirmed that one of its employees allegedly faked documents that were used as collateral to obtain a bankers’ bills of exchanging between last May and July, causing a loss of 969 million yuan.
Some market watchers expressed concern that fallout from the AgBank incident will add to short-term pressure on liquidity in the financial system. While borrowing costs in China remain near decade lows, yields in the bond market jumped last week amid continuing capital outflows from a lower yuan.
“The mess in bill financing will add to already tight liquidity,” said Ji Weijie, a credit analyst at China Securities Co. “More banks are likely to tighten their controls over issuing such financing, which could worsen the liquidity even more.”
Yang Rong, an analyst at China Futures Co, said the crackdown on bill financing may hasten the pace of selling assets paid by bills in order to lock in cash.
“The only bright spot here is that the impact might be limited,” Yang said. “The bill financing market could move back to normal levels after a short-term consolidation.”
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