A recent online bond selling scandal which incurred the biggest ever fine issued by China’s banking regulator has triggered calls for the country’s leading Fintech concerns to be included in macro-prudential assessments of banks
The China Banking Regulatory Commission recently hit China Guangfa Bank with a total of 722 million yuan in fines ($109 million) for guaranteeing defaulted corporates bonds that were sold via Alibaba-backed Fintech platform Ant Financial Services Group.
Southern Chinese phone manufacture Cosun Group initially sold the high-yielding bonds privately via the Zhao Cai Bao (招财宝) online platform run by Ant Financial, before defaulting on them in December last year.
The insurer for the bonds subsequently released guarantee documents bearing the official seal of China Guangfa Bank, claiming that its Huizhou branch committed to guaranteeing the insurance policy.
While China Guangfa claimed that the documents were all forged, CRBC declared last Friday that this was a case of fraud involving collusion between employees at the Huizhou branch and Cosun, to hide the vast amount of non-performing assets and operational losses on the bank’s books.
In addition to CBRC fining China Guangfa, the China Insurance Regulatory Commission also issued Zheshang Property and Casualty Insurance Company a fine of 2 million yuan.
The case has since triggered discussion within China about how the authorities should best regulate the country’s large-scale Fintech concerns, given the key role played by Ant Financial in the scandal.
Members of the banking sector point out that one of the key disputes in the case involved who should bear liability for the bond default, and that if current asset management requirements were strictly applied, Zhao Cai Bao would be the one left holding the bag.
Another key issue is whether or not the buyers of Zhao Cai Bao’s high-yield bond offerings were qualified to make such investments, as well as whether the Fintech platform itself is qualified to engage in private sales of debt to retail investors.
Public data indicates that Zhao Cai Bao is a fully invested subsidiary of Ant Financial registered in Shanghai’s Huangpu district, and that its business scope is for “the provision of financial information intermediation services to individual investors and parties that require funds.”
Dong Ximiao (董希淼), a senior researcher with Renmin University’s Chongyan Institute for Financial Studies, said to 21st Century Business Herald that Zhao Cai Bao is essentially a P2P online lender, and that local financial regulators would have lacked adequate capacity to handle the case effectively, or the authority to issue penalties and fines.
If Zhao Cai Bao is considered an “integrated platform,” then the central government’s Internet Finance Risk Special Rectification Office (互联网金融风险专项整治办公室) should have borne responsibility for regulation, as well as punishment of platforms that commit regulatory breaches.
Dong further points out that investors in private bond issuances are required by regulations to each make an investment of no less than 500,000 yuan, which would be a difficult feat for the average Zhao Cai Bao user.
For this reason the platform re-bundled the products so that it was possible for individual investors to commit to an investment of around 1,000 yuan, enabling it to sidestep requirements for qualified investors.
“Buyers in subordinated bonds are all institutional investors, and the risk for the bonds involved in the case is greater than the risk for bonds on the interbank market,” said Dong.
“However, these bonds were bundled and sold via the retail platform to a large volume of ordinary investors.”
Dong further points out that Zhao Cai Bao may have failed to provide adequate risk warnings or information disclosures.
Zeng Gang (曾刚), chair of the National Institution for Finance & Development, said that a large volume of online financing platforms that currently target retail clients lack adequate information disclosures or risk controls, and are liable to offload risk on individual investors via innovative means.
“While the ability of the Internet to bring more people into contact with financial services plays a definite role of inclusion, it also means that risk can spread to even more entities,” said Zeng. “This relationship needs balance.”
Dong Ximiao is calling for large-scale Fintech companies to be viewed as systemically important financial institutions and made subject to special regulatory measures, such as reserve requirements.
Given their considerable impact upon financial markets and financial stability, Dong recommends that the State Council’s Financial Stability and Development Committee be made responsible for related regulatory duties.
Other leading experts have made similar recommendations, with Sun Guofeng, (孙国峰), head of the People’s Bank of China’s financial research office, stating on multiple occasions that large-scale Fintech companies that could potentially have a material impact upon the financial system should be included in the macro-prudential policy framework, as well as made subject to special regulatory policies.