China is probing a loophole that allowed executives at steel traders and other companies to bridge liquidity shortages for their firms by exceeding credit-card limits, according to three people familiar with the matter.
The People’s Bank of China opened an investigation into abuses of credit card pre-authorizations earlier this month, the people said, asking not to be identified because the probe hasn’t been made public. The probe is examining transactions in December and early January, and found that companies and people gained an aggregate of as much as 10 billion yuan ($1.6 billion) in that time.
China is moving to rein in shadow banking and other risks to the financial system as economic growth slows. The three people said executives used the loophole to get cash for their firms toward the end of the year, when banks often demand companies pay back debts. Companies also scramble for cash ahead of the Chinese New Year holiday, which begins tomorrow, to pay back private debts.
The loophole relates to a feature offered by the China UnionPay Co. payment network that allowed credit-card holders to exceed their credit limit by 15 percent. The service was intended for purchases such as hotel bookings and car rentals, where part of a card-holder’s credit limit is set aside for the purchase, which is completed at a later date.
Even if a card-holder had a credit limit of 10,000 yuan, that user could make a deposit of 1 million yuan into a bank account and then conduct a fake transaction via a third party and access the deposit amount plus 15 percent -- far in excess of the credit limit.
China UnionPay’s media department didn’t immediately respond to an e-mailed list of questions.
Executives exploited the loophole by acquiring many credit cards at once, sometimes with fake identities, the people said.
They said the practice was detected among steel-trading companies that have gotten into financial trouble because of the plunging price of the commodity. The price of domestic hot-rolled steel sheet for immediate delivery has fallen to 3,451 yuan per ton as of Jan. 28, down 16 percent in the past year, according to data tracked by Beijing Antaike Information Development Co.
The credit-card operation needs the complicity of counterparty businesses or shops and the PBOC is looking at whether third-party payment companies and commercial banks were negligent, the people said. They said the central bank may punish some payment companies once the probe is finished.
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