Slippery Future for a Slick Loan Guarantor

飞雪寒冰

Zhang had invested 404 million yuan in Guotai Junan shares and held them under Orienwise Holdings. But these shares made their way into COGC's holdings.

These financial details proved that Zhang had admitted to losses covered up by fabricated results and misallocated funds, and was selling off assets, acknowledging debt and taking other steps to close the gap.

According to COGC sources, Zhang took seemingly redemptive action not only because he had deep sentiments about the company he founded, but also because he had private deals with foreign shareholders who had agreed not to hold him personally liable. Last August, however, foreign shareholders allegedly had planned to take Zhang to court in Hong Kong for fraud.

"In the end, he didn't run away from his obligations," a foreign shareholder's representative told Caijing last November.

飞雪寒冰

Bank Role

Yet the truth damaged COGC's credibility – and business. Its largest bank partner, the Bank of Beijing, had issued nearly 3.1 billion yuan worth of loans through COGC with no cash deposits by the end of 2008. But in May the bank froze around 100 million yuan in Beijing COGC's deposits.

An insider at the Beijing branch of COGC told Caijing that a payback deadline for a 25 million yuan guaranteed loan to Beijing No. 1 Biological Pharmaceutical Co. Ltd. – issued through COGC – had been extended twice by the Bank of Beijing. Now, with no clear plan for repayment, the bank may have to taking money from the frozen COGC account.

Another insider said, "The funds frozen by the bank are for the bank's self-insurance. They aren't worth much. But it is extremely hard for COGC, with its large funding gap, to operate without the money. If this goes on, it will lead to litigation and trigger customers to withdraw their deposits."

One SME manager who went to COGC's office to demand a repayment told Caijing he was owed a 1 million yuan deposit, which had been due a few months earlier. "The money still has not been fully returned to us. Every time we go to COGC to demand repayment, we run into others looking to get their deposits back as well," the manager said. "If we don't get the money by next week, we'll have to sue."

Another client trying to collect overdue money said COGC required each SME client to pay a 10 percent deposit and a loan guarantee fee of 2 to 3 percent. Only then would COGC issue a letter of guarantee for a loan, generally at interest rates of up to 20 percent.

飞雪寒冰

Because banks often required zero cash deposits on COGC's guaranteed loans, COGC apparently found it easy to misappropriate deposits. Before the crisis hit, COGC refunded deposits within three days of a customer's loan payoff. That's no longer the case.

The Beijing office of COGC so far has received a dozen of legal notices demanding the company refund deposits within certain periods.

Zhang's announcement in June that he would sell the Zhangjiajie hotel for an undisclosed amount raised hopes among COGC staffers that the proceeds would be used to refund overdue deposits in the near future.

Meanwhile, COGC is seeking a capital injection from the Shenzhen government. Due diligence has been completed, and the company is awaiting the government's response. However, because Shenzhen's mayor is currently being investigated by the Communist Party for alleged corruption, the company may have to wait.

Zhang and other executives also hope their road show in Beijing, Shanghai, Shenzhen and other cities will reap rewards by drumming bank support.

In his presentation, Zhang announced that, by the end of 2008, the company had lost 150 million yuan, had total assets of 3.9 billion yuan. He also outlined the company's rescue and restructuring plans to banks in hopes of restoring confidence.

COGC also said on June 18 that the China Development Bank will give its backing to the company. But it's unclear whether more banks will follow.