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Unit of China's sovereign wealth fund takes over Xiao Jianhua-linked HengFeng Bank in third case of nationalisation since May

Enoch Yiu enoch.yiu@scmp.com

China's sovereign wealth fund has taken over HengFeng Bank, a troubled lender linked to fugitive financier Xiao Jianhua, in the third case in as many months of the state exerting its grip over wayward financial institutions.

Central Huijin Investment, a subsidiary of the China Investment Corporation that acts as the Chinese government's shareholder in the country's four biggest banks, has emerged as a strategic investor in HengFeng, according to a brief report overnight by Shanghai Securities News, published by state news agency Xinhua.

The investment was a breakthrough in HengFeng's debt restructuring led by the Shandong provincial government, the state-owned newspaper said, without citing a source or providing financial details. Huijin's investment would increase HengFeng's capital adequacy, improve the troubled bank's management and enhance its operational capability, the paper said.

HengFeng, based in Yantai city, was founded in 1987. It operated 18 branches and 306 sub-branches across the country. It is among more than a dozen city-level and rural lenders that had been put on notice by the authorities for a shake-up, as regulators step up their programme of cleaning up financial malfeasance and profligate lending.

Singapore's United Overseas Bank (UOB) wants to sell its 13 per cent stake in HengFeng, which it bought in 2008, according to a report by Bloomberg earlier this year. UOB, the second largest shareholder of HengFeng, said it planned to deploy capital by increasing the number of its own branches in mainland China.

A page on UOB's website, last seen in August 2017, that used to feature HengFeng Bank, also known as Evergrowing Bank, has been removed. UOB could not be reached for comment.

It's also the second of several banks in Xiao's financial empire to be put under state ward, after the May 24 nationalisation of Baoshang Bank in Inner Mongolia's Baotou city.

Xiao's Tomorrow Group, which owned 89 per cent of Baoshang, had misappropriated large sums from the bank, triggering serious credit risks that prompted the government to step in, the central bank said.

Xiao himself had not been seen in public since he was persuaded to return to mainland China from Hong Kong on the eve of the 2017 Lunar New Year to help with investigations into his financial affairs.

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At its apex, Tomorrow Group owned stakes via proxies in hundreds of Chinese listed companies, including at least 10 banks, the China Banking & Insurance Regulatory Commission said on June 9.

Baoshang's seizure was joined on July 29 by Bank of Jinzhou, which received the backing of three Chinese financial institutions, including Industrial & Commercial Bank of China.

ICBC, as the world's largest lender is called, would put 3 billion yuan (US$436 million) into Bank of Jinzhou, and assign at least four senior executives to manage it. Cinda Asset Management and Great Wall Asset Management would also pour funds into Bank of Jinzhou.

The Chinese government's first nationalisation of a privately-owned commercial bank since 1998 has led to a collective collapse in the stock prices of China's listed banks, driving their valuations to record lows, amid fears that the shakeout would affect more lenders, and that the largest and best capitalised institutions would be called upon to bail them out.

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Chinese regulators have good reason for concern. The level of non-performing loans among local lenders licensed to operate within city of urban centres were at 1.9 per cent of their total lending at the end of March, worse than their larger peers, according to CBIRC data.

They were also the least capitalised among all bank categories, with 12.6 per cent capital adequacy ratio, compared with 18.3 per cent in foreign banks.

Rural commercial banks, licensed to serve villages and smaller towns, had 4.1 per cent of their lending classified as bad loans, the data showed. That compared with the 1.1 per cent average among larger nationwide commercial banks, and 0.8 per cent among foreign banks, the data showed.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.