US$117 billion Chinese wealth management firm claims it was scammed

Pedestrians stand along the Bund as skyscrapers of the Pudong Lujiazui Financial District stand across the Huangpu River in Shanghai, China. (Bloomberg pic)

SHANGHAI: For nearly 15 years, Noah Holdings Ltd has thrived by channelling money from rich Chinese investors into the country’s rapidly expanding financial system.

Now the asset manager faces mounting questions about whether it overlooked risks when steering clients into high-yield investment products that some analysts have likened to ticking time bombs.

Noah, which has the equivalent of US$117 billion under advisory and management, said in a statement this week that 3.4 billion yuan (US$495 million) of credit products overseen by one of its units were affected by an alleged fraud at Camsing International Holding Ltd, a conglomerate whose chairman was recently detained by Chinese police.

While it’s unclear if clients will suffer losses, Noah’s shares have tumbled more than 25% this week as critics accused the firm of failing to conduct proper due diligence.

It’s the latest example of turbulence in China’s US$8.8 trillion shadow-banking systems, which has been roiled in recent years by slowing economic growth, record defaults and multiple allegations of financial impropriety.

Camsing confirmed in an exchange filing on July 5 that its chairman had been detained but said that it had been unable to determine why.

The company, which has yet to respond directly to Noah’s allegations, didn’t answer repeated calls seeking comment. Its shares have dropped 89% in Hong Kong this week.

Noah, founded in 2005 by former private banker Wang Jingbo and named after the biblical character, became the first Chinese asset manager to list shares in New York in 2010 and is now one of the country’s biggest firms focused on the ultra-rich.

Buoyed by the surging ranks of Chinese millionaires and the proliferation of lightly regulated shadow-banking products, the company has increased its number of wealth-management clients by fourfold since the end of 2014 to more than 274,000.

Noah earns most of its fees from distributing third-party investments, but its Gopher Asset Management unit oversees about US$25 billion in investment products of its own design.

Gopher was responsible for arranging the Camsing products, which were among the firm’s most popular offerings in recent years.

Noah marketing materials from March 14 seen by Bloomberg News said the products were backed by accounts payable to Camsing from a unit of JD.com, one of China’s biggest e-commerce companies.

Some of the products had an expected annualised return of 7.7% for an investment duration of 9 to 10 months.

That’s about five times higher than China’s benchmark deposit rate and typical of the firm’s offerings.

In its statement this week, Noah alleged that Camsing was involved in “well-designed fraud cases that lasted several years, with many financial institutions and individuals being victims.”

JD.com said it was cooperating with police.

“Camsing falsified JD.com’s business contracts, engaging in fraudulent behaviour,” a JD.com spokeswoman said by email. “We are shocked that this occurred.”

To be sure, Noah is not alone. Central China Securities Co., a mid-sized brokerage, said on Thursday two asset management products totalling 240 million yuan are in danger of defaulting after the borrower falsified documents. It didn’t provide more details.

For Noah, the incident has raised questions about the firm’s approach to risk management, said Yan Hong, a finance professor at Shanghai Jiao Tong University.

“It exposed the lack of credit-risk controls and absence of a verification mechanism for contract authenticity, which is a low-level mistake for a manager of private credit products,” Yan said.

It’s not the first time that Noah’s investments have run into trouble, as JPMorgan Chase & Co. analysts noted in a July 8 research report.

In 2017, products managed by Gopher had exposure to China Huishan Dairy Holdings Co., which collapsed after being targeted by short sellers.

In May 2018, Noah’s Hong Kong unit was fined by the city’s securities regulator for failing to comply with know-your-customer, due diligence and other requirements.

One lesson for asset managers is that they should talk to all of the relevant parties in an investment before committing money, said Jesse Si, a Beijing-based senior manager at Mintz Group, which specialises in due diligence investigations.

Sun Jianbo, president of China Vision Capital Management in Beijing, said he was approached in March about taking part in a similar product linked to Camsing but decided not to participate after he was unable to confirm the details with JD.com.

“We asked to sign contracts face-to-face with executives of JD, but the agent couldn’t find a verified executive or manager for this process, so we passed,” Sun said by phone. “For me, verifying contracts is the core and most basic thing in compliance.”