Wall Street Journal - January 6, 2000
Collapse of Illegal Bank in China Spotlights Highly Risky Venture
By IAN JOHNSON Staff Reporter of THE WALL STREET JOURNAL
CHONGQING, China -- For four months, Zhang Shi has neglected her farm work for something more crucial to her survival: a daily protest in front of city hall.
The 68-year-old mother of three is one of 40,000 residents of this sprawling, smoggy city to have lost their life savings to one of the most audacious banking scandals in China's 20-year reform era. Ms. Zhang put her money in what amounted to an illegal bank -- which, according to investors and local press reports, was organized and run by city officials in collusion with officials from the People's Bank of China, the central bank that regulates China's banking system.
The bank, called the Chongqing New Land High-Tech Development Co., closed its doors in April, after having squandered nearly $20 million of its $57.5 million in deposits. Equally remarkable was the degree of official involvement: New Land was founded and staffed by employees of the Chongqing city government, which with 31 million residents is China's largest city and reports directly to the central government.
Press Blackout
The case has spooked Beijing, which is trying to extricate China's state banks from a mountain of bad debts that have left them technically bankrupt. Worried that news of Chongqing's problems would spark a run on bigger banks, censors have imposed a press blackout, save for a handful of articles that appeared last year in local government-run newspapers.
Officials from the central bank and the Chongqing municipal government declined to comment for this article.
But anecdotal evidence suggests the problem is widespread. Beijing doesn't release statistics on the number of illegal banks it has closed in recent years, but dozens of such institutions have sprung up in provinces such as Guangdong, Liaoning and Hubei. Chongqing, located in China's impoverished and often chaotic hinterland, seems especially vulnerable. In that city alone, New Land was the 162nd illegal bank set up since 1993, according to local press reports.
New Land was founded in 1993, a time of rapid economic growth and get-rich-quick schemes. The bank's general manager was Cao Yang, deputy head of the Chongqing High-Tech Development Zone. His deputy was Luo Guangfen, deputy head of the personnel office in Shapingba, a district in Chongqing.
Originally, a Hong Kong company was supposed to invest in the company, but it pulled out before the deal was consummated. Instead, local press reports say the People's Bank of China allowed New Land to solicit money from ordinary people, attracting $27.2 million in deposits over the next four years. The two founders also created an affiliated company called Hui Xin, which means "gathering money," that gathered $30.3 million in deposits.
Guaranteed Rates
Ordinary investors like Ms. Zhang remember New Land well. It rented billboards throughout the city and set up offices in government buildings. "You invested by going into the city government's office," says a bleary-eyed Ms. Zhang, taking a break from lying in the middle of the road, where 100 protesters gathered on a recent afternoon. "They guaranteed 30% interest rates, so it was really appealing."
At first, New Land made its interest payments, disbursing more than $6 million to depositors. But the company also wasted huge amounts of money. Local press reports say New Land spent $3.4 million bribing bank regulators and another $2.2 million on 17 investment projects that soon went bankrupt. Company officials also profited handsomely: The staff of 50 received $3.6 million over four years.
Last spring came the inevitable collapse. With debts piling up, New Land failed to make interest payments, sparking massive protests. On April 30, Mr. Cao died of an unspecified illness and Mr. Luo was arrested, tried, fined $62,000 and sentenced to 10 years in jail.
When investors saw that no money was forthcoming, thousands rioted, blocking the roads in front of city hall and shouting: "Government, pay our money back." The government made a plea to Beijing, which issued an emergency loan allowing the city to pay back anyone who deposited less than $600 -- a move that satisfied most protesters. Those who had invested more are to eventually get back 70% of their deposits -- a promise that could saddle the local government, already one of China's poorest, with payments of $13 million.
But thousands of victims of the banking scandal, dozens of whom protest daily, remain unsatisfied. "Who knows when we'll see the money," says Liu Xin, a retired advertising salesman who invested $2,200 in New Land. "I used to be rich. Now I'm a poor man again."