Bank lent 3 billion yuan to companies linked to collapsed Hangzhou conglomerate

China Construction Bank’s Zhejiang Province division is embroiled in a toxic loan crisis following the collapse of Hangzhou-based conglomerate Zhejiang Zhongjiang Holding Co. Ltd.

The branch lent 3 billion yuan to companies directly or indirectly tied to Zhongjiang, a source from the bank said, citing internal probe results.

“This is the largest loan crisis that has ever happened to CCB,” a senior regulatory official familiar with the situation said.

The conglomerate also owes other creditors, including banks and 68 companies, roughly 5 billion yuan, a preliminary investigation by the Hangzhou government found.

Bank of China and Industrial and Commercial Bank of China’s Zhejiang branches lent the conglomerate 1 billion and 150 million yuan, respectively, a source close to CCB’s Zhejiang division said.

Citibank’s Shanghai branch also lent several tens of millions of yuan to the group, a source said.

So far, the case involves a total of 8 billion yuan in outstanding debts, a record for Hangzhou, the ongoing investigation has found. The final results of the inquiry will be published this month, the Hangzhou government says.

CCB’s loans to Zhongjiang stood at only 1 billion yuan at the end of 2010. The amount grew rapidly, despite the group’s worsening financial conditions.

In June 2011, Bank of Communications called in a 100 million yuan loan to Zhongjiang because of risk concerns.

Meanwhile, CCB kept lending. It issued a wealth management product three months later, raising 300 million yuan for Zhongjiang companies.

CCB did not receive a penny of interest payment on the loan, a source from the bank said.

“It is hard to perceive why a business group of Zhongjiang’s size could have borrowed such a huge amount of bank loans,” a banker close to the situation said. “Three sub-branches of CCB all lent to the group. It seems to be the result of more than a few individuals working together.”

CCB’s headquarters has launched an internal investigation over whether the officials at Zhejiang branches abused their power to help Zhongjiang chairman, Yu Zhongjiang, get loans. It has also revoked the branches’ rights to making large loans.

Cui Binzhou, president of CCB’s Zhejiang branch, has been removed from his post. The investigation also found another 40 to 50 employees in Zhejiang were connected to making the bad loans. It was unclear how they might be punished.

Yu has been detained by police for illegally soliciting funds, the Hangzhou government said on June 14.

A source close to Yu said he was taken into custody three months earlier in the Wyndham Grand Plaza Royale Hangzhou, a luxury hotel that cost him a fortune to acquire but turned out to be a dead weight, many people familiar with the situation said.

Yu started acquiring the hotel in 2008. By then, his businesses had already run into financial difficulties on the back of property investments that failed.

He financed the acquisition almost entirely through loans, even by signing IOU notes to company employees, a source close to him said. The interest repayment on these debts alone reached hundreds of millions of yuan.

Yu also faces allegations of cheating on loans by forging seals for loan applications, sources close to CCB said.

“A number of senior officials from the headquarters have paid a visit to Zhejiang branches” since the loan crisis broke out, a source close to CCB’s Zhejiang branch said. “They also initiated a thorough review of CCB’s loan conditions” to keep the crisis from spreading.

By staff reporters Shen Hu and Wen Xiu