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How a China Bank Foxed Regulators And May Force a Market Rethink

  • Pudong Bank branch found to use shell firms to hide bad debt
  • Market may re-rate highly leveraged banks: Guangfa analyst
Pedestrians holding umbrellas walk past buildings illuminated at night in the Lujiazui district of Shanghai, China, on Thursday, Oct. 29, 2015. The Communist Party ended its four-day plenum on Thursday, with Premier Li Keqiang signaling the leadership may be ready to accept the weakest period of expansion since the economy was opened up three decades ago.

Photographer: Qilai Shen/Bloomberg

For years, a branch of a mid-sized Chinese bank outshone rivals by reporting zero bad loans at a time others were struggling with rising soured debt.

Financial indicators at Shanghai Pudong Development Bank Co..’s branch in the western Chengdu city were healthy, officials raised no red flags, and Fitch Ratings upgraded the parent last July citing tighter support and supervision by local authorities. Unknown to most, however, regulators had been probing the lender for a fraud that may reverberate across China’s financial industry.