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China’s Investment Scandal Engulfs World’s Biggest Banks

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Published on : Dec 03, 2015

Unhealthy marketing practices and flawed investment products, which were rocking the reputation of Chinese banks until now, like endemic have now spread to the biggest lenders in the world by assets. 

Police officials in Sichuan province have already detailed five employees from the Chengdu branch of the Industrial and Commercial Bank of China after the wealth management products they dealt with was busted, as reports of a mainland Chinese media. 

Officials at the fund management company based in Shenzhen that issues the products also have been arrested. They are slapped with the charges of illegally accumulating deposits from the public. According the reports, this latest instance of rogue banking in China led to the loss of over 400 million yuan of more than 100 high-net-worth clients in the country. 

Speaking about the ongoing situation, head of China equity strategy department at America Merrill Lynch Bank, David Cui, said that default cases have become increasingly common in the wealth management industry of China. He feels that the situations are unlikely to change for better as China continues to struggle to attain sustainable growth and an increasing number of businesses come under the financial pressure. 

Leading banks in China drive the country’s wealth management industry. During such an ongoing economic crisis, many of these banks are trying to dodge rules laid down for on-balance-sheet lending. Hence, these banks have resorted to promoting investment products instead of accepting funds in the form of deposits. These funds are then channeled off their balance sheets as risky projects with high returns such as mining or real estate. 

The ICBC branch located in Chengdu in 2012 had launched three products, promising that they would yield an annual return of 18%. Lured by the claims over 100 investors invested between 1 mn to 48 mn yuan in the project. However, the ICBC bank now claims that bank managers ignored the associated risks and continued marketing the products. Thus, failure to communicate investor risk has become a common practice in China said Chen Shujin who is an analyst with analyst at DBS Vickers.