China's Huaxia may face liability for troubled wealth product sale

Mon Dec 3, 2012 11:06pm EST
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BEIJING (Reuters) - China's Huaxia Bank Co Ltd (600015.SS: Quote) may face some liability after a rogue employee sold unauthorized wealth management products which weekend reports claimed had stopped making payments, a bank official said on Tuesday.

An employee at Huaxia's Jiading branch, in a Shanghai suburb, sold the instruments issued by the Zhongding Wealth Investment Center without permission, and a police investigation is underway, the bank said on Monday.

A spokesman for the bank's Shanghai operations told Reuters that police investigators may assign some liability to the bank.

"Currently, investors think Huaxia Bank must take the responsibility and no matter what we argue, they won't listen to us. So we must let the police and judiciary decide the different responsibilities of all parties involved in this case," Huaxia's Shanghai division spokesman told Reuters.

"But it cannot be understood that the bank will pay for the default."

Huaxia has said it was "aware" of reports that the investments could not be repaid when the product matured, but has not confirmed those reports.

So far, there has not been a high-profile case of default by a Chinese wealth management product, many of which are marketed by banks and highly sought by retail depositors for their higher interest rates. Banks' liability for the performance of third-party instruments is therefore untested.

"We will take the responsibility that we should take, but there are some legal procedures to follow," Huaxia Bank's Shanghai division head Zheng Chao told investors assembled at door of his offices, according to the Securities Times on Tuesday.

Bankers and analysts worry that the proliferation of wealth management products, which promise higher interest rates than savings accounts, poses a danger to the Chinese banking system because of their opacity, and the risk that banks may have to cover any default.   Continued...