The ongoing investigation into alleged irregularities in Shanghai's pension fund is squeezing some of the city's largest property developers who borrowed money from the fund through banking intermediaries.

 

To restore proper records, investigators have asked the banks to recall the loans, believed to amount to many billions of yuan, which may have breached pension fund regulations. The recall could put a strain on the finance of some developers, causing delays in the development of their projects.

 

Soon after the pension fund irregularities were exposed in mid-August, the central government organized a joint panel to investigate the case and recover billions of yuan worth of funds thought to have been improperly invested on the property market.

 

The amount of money improperly loaned through banks to property developers in Shanghai by the Shanghai Bureau of Labor and Social Security (SBLSS), in charge of the pension fund, is estimated to be in the billions of yuan. But local media widely estimated the amount to be 3.5 billion yuan to 7 billion yuan (US$437-875 million).

 

Hong Kong-based property developer Shui On Land Ltd is said to be involved in the mismanagement of the fund, borrowing 1.5 billion yuan.

 

Shui On Group Chairman Vincent Lo Hong-sui recently told Hong Kong media that his company did borrow 1.5 billion yuan from the pension fund, an arrangement made by Shanghai Pudong Development Bank acting as an intermediary to invest in a large-scale project in the Yangpu District of Shanghai.

 

"We are sure to make some statement about it after we make it clear," he was quoted as saying. "Shui On Land has no direct link with the Shanghai pension fund scandal, and the borrowing of the money tallies with mainland regulations."

 

But Shui On Land is not the only property developer to have borrowed from the pension fund, said a person who is familiar with the industry. "More than 10 property developers at least have borrowed from the pension fund for their projects," he told China Daily yesterday.

 

The flow of finance from the pension fund into property development is not a secret within the property industry. "Only those property developers who have extremely close ties with the local government may get the funds," said a market source.

 

In the early 1990s, Shanghai's pension fund was devalued out of its direct investment by owner SBLSS on the property market. Later, the SBLSS entrusted Shanghai Pudong Development Bank with the management of the fund, which reached up to 10 billion yuan (US$1.25 billion) at its peak, until 1999 when the fund was again self-managed by the SBLSS.

 

Over this period, a huge amount of the pension fund flowed into many projects in Shanghai. Mingtian Plaza and Donghai Plaza, now worth more than 2 billion yuan (US$250 million) each, are known to have been financed by the pension fund, among many others.

 

After 1999, the SBLSS put a stop to direct investment in property, instead using commercial banks as an agent to loan funds indirectly to projects.

 

"This indirect lending practice appears legal in terms of its formality, but it's illegal in terms of its essence," a lawyer specializing in property told China Daily.

 

He said banks may only charge commission but they don't guarantee financial safety, no different to the direct investment that was banned by the government. According to the latest reports, Shanghai banks have now stopped all SBLSS-related lending.

 

While the loans recall may cause problems for individual developers, it won't impact Shanghai's property market, said an analyst.

 

He predicted the government may not reclaim the funds immediately. "They would use an alternative to take it back, or else some property developers may be driven to the brink of bankruptcy."

 

(China Daily September 7, 2006)