World’s biggest bank gets caught up in China investment scandal

Bad marketing and flawed investment products rocking the reputations of Chinese banks have now spread to the world’s biggest lender by assets.

Police in Sichuan province have detained five employees at an Industrial and Commercial Bank of China branch in Chengdu after wealth management products they marketed went bust, according to mainland Chinese media.

Officials at the Shenzhen-based fund management company that issued the products have also been arrested on charges of “illegally collecting deposits from the public”. More than 100 high-net-worth clients lost 400 million yuan in this latest instance of rogue banking in China.

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Default cases in China’s wealth management industry have become increasingly common, says David Cui, head of China equity strategy at Bank of America Merrill Lynch. “And it probably will become more common as growth continues to struggle and more and more businesses come under pressure financially.”

The wealth management industry in China has been driven by banks looking to dodge the rules for on-balance-sheet lending. Instead of taking in funds in the form of deposits, banks have promoted investment products that are channelled off their balance sheets to high-return but often risky projects such as real estate and mining.

The ICBC branch in Chengdu launched three products in 2012, promising annual returns of 18 per cent. More than 100 investors put in between 1 million yuan and 48 million yuan each for a total of 670 million yuan.

The funds were channelled to mining projects but those projects suffered a liquidity pinch last year and some 400 million yuan from two of the products was lost, Chinese newspaper Economic Observer reported.

Backing of a major bank such as ICBC has often been the selling point for investors. One person who invested 3 million yuan in one of the products told the Economic Observer that they would not have made the investment had it not been for the repeated assurances from ICBC managers.