Who Pays When a Wealth Product Fails?

A crowd of angry investors packed a Shanghai branch of Huaxia Bank on December 3 after they heard that the money wasn’t there for the first of four repayments for a 119 million-yuan wealth management plan. They demanded their money back from Huaxia.

Among the protesters was a factory owner from the nearby city of Ningbo, who rushed to Shanghai with his wife and groom-to-be son after hearing his investment was in trouble.

The factory owner had invested all of his 1.1 million yuan set aside for his son and bride at a Huaxia branch in Jiading, a suburb of Shanghai. He feared he’d lost all of his investment, something that has never happened to a wealth management product in China.

By most standards, the Ningbo man says he’s not a typical risk-taker. He owns a small garment factory, lives a modest life, and got the money he invested from the sale of an old house.

He had planned to buy another wealth product with an expected annual interest rate of 5.8 percent, he said.

“I had filled out the purchase form for that product,” he said. “The bank’s lobby manager saw I was about to invest 1.1 million yuan and told me, ‘Why don’t you go inside [the VIP room]? We have a better product with a 12 percent annual interest. It’s 100 percent risk-free. All you need to do is pick up your money when the time comes.’”

Without reading the contract, the man said, he signed and bought a piece of a plan called Zhongding Wealth Investment Center. His portion was to mature in January.

President Bought It

The factory owner’s experience was common among the forty-odd investors mulling around the bank on that day of protest, several days after news spread that the investment was in trouble.

They gathered first at the Huaxia branch in Jiading, then took their protest to the bank’s downtown Shanghai branch. They claimed bank employees recommended the product and all the contracts had been signed at the bank with the help of Huaxia staff.

However, Huaxia officials say the bank is not responsible, and they refused to pay any compensation. They said the Zhongding plan was not sold by the bank but by a now-former employee.

The bank argues the former employee, Pu Tingting, acted without the permission of Huaxia executives.

Pu was fired November 25, the same day the first repayment for the Zhongding plan was due. Huaxia says she is being investigated by police in connection with what could be a fraudulent wealth product.

Pu’s husband said it was difficult to believe the bank did not know his wife was selling the wealth plan. He said Pu have even told her branch president, Jiang Li, about the product.

Under the plan, Tongshang Guoyin Asset Management Co., an investment firm in Beijing, was to finance several projects with money raised from investors in wealth products.

Jiang thought highly of the opportunity, invested 1.7 million yuan in the product himself, and introduced it to his younger sister and clients, Pu’s husband said.

Pu also recommended the wealth management product to her family members and friends, who invested several million yuan.

Investors said the bank touted the Zhongding plan to customers by saying Jiang had invested in it.

“I asked if there was any risk,” one investor said. “They said there was none because ‘the bank’s president has bought into it, and so has his younger sister.’”

Henan Connection

Subscription in the Zhongding plan began in late 2011, lasted six months, and raised 119 million yuan. Zhongding documents show all money went to Tongshang Guoyin for four projects tied to a Henan province businessman named Wei Chenyang.

But it seems the projects never got the money.

Beijing-based Zhongfa Investment Guarantee Co. Ltd. guaranteed the wealth management product. It has refused to repay investors on grounds that Wei did not channel the money into the intended projects.

The company suspected fraud and has sought to confront Wei, a Zhongfa executive said. However, so far they haven’t found him.

“We reported to Zhengzhou police in November,” the Zhongfa executive said, referring to the capital of the province. “They said they had already filed a case against Wei, taken him into custody, and secured some of his assets.”

Wei faked the corporate seals of two companies in which part of the money should have been invested, the executive said. The owner of one company, a car dealership, said he did not know about the investment. Another, a pawnshop, never got to use the money.

The other two investment targets—another dealership and an entertainment club undergoing a renovation—never used the money, the executive said. The second dealership went bankrupt soon after financing was completed.

It’s likely no one but Wei knows where they money went, the executive said.

Up to 400 Investors

Yet the investors have continued focusing their blame on Huaxia. Many accuse the bank of trying to use the former employee, Pu, as a scapegoat. They say Zhongding was like any other wealth management plan approved and sold by the bank.

However, an official from Huaxia’s Shanghai branch argued that the bank’s name is not mentioned in the contract. It was, he said, an agreement between individual investors and Tongshang Guoyin, with Zhongfa acting as the guarantee firm and another bank as custodian.

In fact, Huaxia is not liable for any wealth management plan offered over the counter at its branches, a separate source familiar with the situation said.

Most people buying the bank’s wealth management products do not factor in the risk of default because it is assumed that banks implicitly guarantee the products they sell. Wealth management plans are thus often regarded as equal to ordinary deposits.

Many Zhongding investors did not meet the 500,000-yuan requirement to invest. To get around this, many convinced family members and friends to chip in.

Zhongding documents say only about eighty people invested in the product. But people who gathered at the bank estimated as many 400 could have been involved.

“I invested more than 1 million yuan under my name but there are actually a dozen of my colleagues involved,” one woman said.

Medicine Time?

Wealth management plans in China have grown in popularity in recent years. By the end of June, total investment in such products was 6 trillion yuan, data from the banking regulator shows. At the end of 2009, the figure was just 1.7 trillion yuan.

To date, not a single wealth management product has defaulted, although critics, including Bank of China President Xiao Gang, have said that in some cases banks sold new products to pay off old ones.

China International Capital Corp. (CICC) published a research report on December 5 to address this case. The investment bank said investors should be educated about the risk involved with bank’s wealth products.

Huaxia does not bear responsibility, the report argues, and the banking regulator should not force the bank to compensate losing investors. Holding the bank responsible, CICC warns, would pose bigger problems for the banking system.

“If it turns out in the end that Huaxia has to repay investors, it would indicate that banks would be the ultimate payer for the binging in various financing channels,” the report said.

The report said that now was the time to tell investors that high-reward investments were also highly risky. But it would be a bitter pill to swallow for the Ningbo factory owner.

“I just want my principal back,” he said. “I don’t care about the interest anymore.”

Topics: 
Business, Law
Keywords: 
Wealth, Banking, Investment, Fraud