Baoshang Bank collapsed after extending billions of yuan in loans to affiliates, as big shareholder Tomorrow Group took advantage of flawed corporate governance and mismanagement, according to a publication by China's central bank.
Tomorrow Group illegally borrowed 156 billion yuan (US$22.3 billion) from Baoshang Bank, which was taken over by the government last year, in the form of 347 loans through 209 shell companies from 2005 to 2019 and these subsequently became non-performing ones, wrote Zhou Xuedong, head of the takeover team, in an article published in the latest issue of China Finance.
Baoshang Bank and Tomorrow Group were both owned by troubled tycoon Xiao Jianhua, who is believed to be awaiting trial for bribery and manipulating share prices.
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The shareholder interfered in Baoshang Bank's daily business operations, chipping away at the bank's risk controls while also manipulating the shareholder meetings, the article said.
"Baoshang Bank's downfall was not because of one person and did not come overnight," the article said. "On top of the failure on business and corporate governance, bad corporate culture was an important reason as well."
Diversified shareholding structures, strengthened external supervision and decent information disclosures were crucial to improving corporate governance at commercial banks and improving transparency, it said.
Baoshang Bank was the first Chinese lender that was take oven by the government in two decades, as it became insolvent after Tomorrow Group and its affiliates were not able to pay principal and interest on loans.
Baoshang Bank was once a key part of Xiao's business empire, which held stakes in hundreds of Chinese listed companies via proxies, ranging from energy, financial services and technology to real estate.
Xiao left Hong Kong in January 2017, on the eve of the Lunar New Year, for the mainland where he is believed to be helping authorities with their inquiries as part of one of their biggest ever crackdowns into deal making. He has not been seen in public since.
Following the seizure of Baoshang, regulators took over two other embattled lenders, Hengfeng Bank and Jinzhou Bank in August last year. All three insolvent banks were previously controlled by Xiao, founder of the conglomerate Tomorrow Group.
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This article originally appeared on the South China Morning Post (www.scmp.com), the leading news media reporting on China and Asia.
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