Posted on 03/16/2002 5:34:57 PM PST by Boyd
Liu Mingkang, president of the Bank of China, faces a delicate task. As he prepares one of China's four big state-owned banks for a stock market listing overseas later this year, he has a bit of a public relations problem.
He now should be burnishing the bank's credentials for a global financial community eager to find ways to invest in China. Instead, he finds himself battling to pull the institution through the mainland's biggest financial scandal since 1949, when the Communist party took power.
The latest revelations came on Friday, when Mr Liu said that five officials in the small southern Chinese city of Kaiping had stolen at least $483m through the local BoC branch over a period of seven years and then laundered the money in gambling centres such as Las Vegas and Macau.
When a bank audit committee moved in last year, the officials were well prepared to make their escape. With dozens of fake passports at the ready, says Mr Liu, they fled to the US and Canada, where they are being sought today. Three lawyers in Hong Kong were arrested and then later released on bail in connection with the case.
The alleged theft follows the BoC's agreement last month to pay a $20m fine for loan irregularities at its New York branch. Mr Liu's once highly regarded predecessor, Wang Xuebing, who left the post in 2000, was removed in disgrace from his new position as head of the China Construction Bank and detained by police.
The stream of scandals at the Bank of China, the mainland's most highly regarded financial institution and largest foreign exchange bank, has been a reminder of the deep-seated weakness at the heart of the mainland's considerable economic success.
It has been known for some time that China's big four state-owned banks - the Industrial and Commercial Bank of China (ICBC), the BoC, the Agricultural Bank and the China Construction Bank (CCB) - are technically insolvent. What has been less clear until recent months has been the extent both of systemic corruption and bad management among the big four, which together hold 70 per cent of China's banking assets.
Chinese banks have neither a functioning system of internal controls, nor effective eternal oversight, says Fred Hu, the Hong Kong-based China economist for Goldman Sachs. The result is reckless lending, rampant fraud and epidemic misconduct.
To Mr Liu's credit, he has been on the front foot since he took over almost two years ago, issuing strict guidelines about corporate governance and loan approvals. Mr Liu said yesterday that after he took over from Mr Wang, he and his colleagues inherited a bank with a "lack of integrity, compliance, discipline and transparency, no due diligence and no strategy".
He maintained that it was the introduction of a more standard-ised computer system in Guangdong province that uncovered the $500m-dollar hole in the accounts in Kaiping, a small city, by Chinese standards, of about 700,000 people. The bank has employed 6,000 software experts full-time on the project to streamline its internal controls.
Mr Liu is bravely insisting that the initial public offering of the bank's Hong Kong operations will go ahead as scheduled this year, in both the territory and New York. But analysts say that, at the very least, the BoC may be forced to reduce the size of the planned $4bn-5bn offering and the price of the shares.
Ultimately, the timing of the IPO will be determined by whether the market buys Mr Liu's sales pitch that he can reform the BoC's internal culture and reduce bad loans from about 27 per cent to 15 per cent in five years. By then, Chinese banking will be opened fully to foreign competition under the terms of the country's entry into the World Trade Organisation.
The BoC's problems also raise the issue of what nasty surprises are hidden away in the books of the three other big banks. There are many unanswered questions. There has yet to be a follow-up to a 1999 announcement that the audit office found Rmb400bn ($48.3bn) in "misused funds" at 4,600 branches of the ICBC and 1,700 branches of the CCB.
Nor has the government seen fit to launch a public inquiry to explain what has happened to billions of "missing" foreign exchange reserves. In 1998 the combined total of foreign direct investment and the trade surplus was $89bn but foreign exchange reserves grew by only $5.1bn. In 1999, the reserves grew by $9.72bn on an investment and trade surplus of $76bn.
Little progress has so far been made on the crucial issue of dealing with the big four's bad loans. These top $500bn by most accounts - or nearly half China's gross domestic product. Of the four asset management companies formed to take Rmb1,400bn ($170bn) in bad debts off the books of each of the four big banks, only one has successfully auctioned off a batch of loans.
Even then, the company involved, which is attached to the ICBC, raised only a modest amount in cash - about $117m. It hopes to double this figure through debt work-outs with the 254 debtors included in this round. At this pace, according to Goldman's Mr Hu, it will takes years - possibly decades - to clear the bad loans. If there is any silver lining in this mess for Mr Liu, it is that the scandal has at least got some of his bad news out into the market early.
Now that is a freudian slip if I ever saw one.
Chinese banking will be opened fully to foreign competition under the terms of the country's entry into the World Trade Organisation.
How many industries got this little bone tossed to them I wonder? Funny how the people who own the Federal Reserve seem to get their hands in everything.
Summary of the William J. Casey Institute
of the Center for Security Policy
Luncheon and Symposium on:
'The Asian Financial Crisis: The Exception or the Rule?'
4 May 1998
New York, NY
Over the past few weeks, growing concern has been expressed in capitals and markets around the world that Asia's financial crisis is intensifying and spreading, with potentially global repercussions. Such a prospect is prompting policy-makers and interest groups in the United States (among other places) to urge Congress to approve major new infusions of taxpayer resources for bail-outs run by the International Monetary Fund (IMF). Others are arguing that the private sector is the only mechanism capable of effecting necessary structural changes. If Washington and other industrialized nations are to avoid making what may prove to be multi-billion dollar mistakes, the character and causes of this crisis must be properly understood.
China's Campaign to Penetrate the U.S. Capital Markets/Political System
"So, over time, you could well have millions of Americans, wittingly or unwittingly, holding Chinese (or Russian) government paper in their investment portfolios. You already have the Chinese in our bond market to the tune of over $7 billion.
"These foreign governments are creating vested financial interests on the part of politically powerful constituencies in this country, millions of our citizens, to ensure that U.S. economic sanctions are not imposed on these governments. In short, U.S. investors will probably not want China penalized when it sells missile parts to Pakistan or Iran, or otherwise violate the missile technology control regime. Even in the cases of nuclear materials for the production of weapons, nuclear reactors to Iran or whatever it may be, U.S. investors could be sufficiently exposed to say, 'Look, if there are economic sanctions and if you are going to impose financial penalties or restrict the access of these foreign governments to our markets, what do we do when it comes time to redeem our bonds and pension funds?'"
"For example, take Great Wall Enterprises. They want to come to the U.S. bond market in the next 12 months -- and they'll probably get here, barring action on the part of some folks around here. Who are they? Well, they're the ones that cut the [controversial] deals with Loral and Hughes. What is their business? They build strategic intercontinental ballistic missiles targeted at the United States. That's what. So buy bonds, but think hard about who is in the cross-hairs of your capital flows."
"Beijing may have learned that its dependency on U.S. stability and markets is greater than anticipated. Maybe they [can be made to] understand the potential costs of continued proliferation and mischief making in the Persian Gulf, Indian sub-continent, and elsewhere of the nuclear variety. And maybe they will resist funding those kinds of activities, not to mention the abuse of human rights."
I felt the big Hector Mine 6.8 quake really well when I was living up in the Victor Valley and it and the aftershocks were strong and I was a good 50 miles away.
I did see what it had damage it had done to an overpass bridge on Interstate 40 a few weeks later. Awesome!
Clancy addressed the dangers of this in one of his recent books, "The Bear and the Dragon" (I believe that was the title!)
As the ChiComs leave communism and moved into State Controlled Fascism, this will be a big danger. The banks and other so called corporate entities will make Arthur Andersen look like a poster boy for good auditing practices!
Las Vegas caters to the high rollers. There's an elaborate "shrine" to a Buddhist
god outside a LV casino where the Asian high rollers go to pray for "good luck."
We find out - predictably - "luck" doesn't have anything to do with it.
This happened in Taiwan and is happening in China. A very close friend once asked me to invest a factory in China and the profit was not from the factory, it should come from LOAN from local banks. Of course "Guan Xi" was the KEY and I did not participate.
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