China to punish eight banks for making improper loans

China will punish eight banks, including its two biggest lenders, for making improper loans used by two state companies to buy stocks and real estate.

Photo: China to punish eight banks for making improper loans

The announcement reflected government efforts to clean up China's scandal-plagued banks and rein in real estate and stock market speculation that communist leaders worry could spin out of control.

The banks will be fined and several bank managers reprimanded, the China Banking Regulatory Commission said. It said one bank will be forced to suspend some lending.

"Banks must learn a lesson from this and improve management and stick to good international practice of knowing their customers," the CBRC said in a statement.

China's state-owned banking industry has suffered a string of scandals over managers who embezzled money, took bribes to authorize improper loans or misused their institutions' money.

In the latest cases, two major government companies, China Nuclear Engineering & Construction Corp. and China Ocean Shipping Co., violated lending conditions by investing loans in real estate and stocks, the bank regulator said.

Banks hit by penalties include Industrial and Commercial Bank of China Ltd. and the Bank of China Ltd., the country's biggest and second-biggest commercial lenders.

The regulator said bank managers failed to properly monitor lending but its statement gave no indication that any were accused of criminal misconduct.

China Ocean Shipping, also known as COSCO, borrowed 2.7 billion yuan (US$350 million; EUR260 million) since June 2006 from six banks and used at least 2.4 billion yuan (US$315 million; EUR235 million) to invest in initial stock offerings, the agency said.

The loans came from the Shanghai branches of ICBC, Bank of China and mid-size lenders China Merchants Bank Co., China Citic Bank Corp., Industrial Bank Co. and Shenzhen Development Bank Co.

China Nuclear Engineering misused about 2.3 billion yuan (US$300 million; EUR225 million) borrowed since 2001 from the Bank of Beijing Ltd. and the Beijing branch of the Bank of Communications Ltd., the CBRC said.

The penalties came at a time when Beijing is trying to cool off surging housing prices and a stock market boom by tightening controls on the use of borrowed money for real estate and securities purchases.

"The commission believes these improper loans occurred because the banks failed to perform due diligence before the loans and then failed to monitor borrowers afterward," its statement said.

The heaviest penalties were imposed on China Merchants Bank.

Regulators confiscated an unspecified amount of profits from its lending and fined the bank 5 million yuan (US$650,000; EUR480,000), the bank agency said. It said the branch's senior managers were stripped of their professional certifications and it was ordered to suspend commercial lending for six months.

The other banks were fined 500,000 yuan (US$65,000; EUR50,000), the statement said.

China Nuclear Engineering and COSCO also are to be penalized by the government agency that oversees major state-owned companies, the banking agency said.