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Email Story to a Friend June 28, 2006 China discloses $1.1 billion bank fraud By Peter S. Goodman The Washington Post SHANGHAI — The Chinese government's disclosure this week of $1.1 billion worth of fraud at one of the country's largest state-owned banks underscores the risks confronting foreign investors and the precarious nature of China's corruption-ridden financial system. China's National Audit Office on Monday announced that an examination of records at the Agricultural Bank of China — one of four state-owned giants — uncovered 51 cases of criminal wrongdoing involving 157 people during 2004. The state audit also found evidence of $1.8 billion in improperly handled deposits, and $3.5 billion in illegal loans. The latest details of fraud come as China presses to eradicate the taint of corruption from its state-owned banks as it courts foreign capital in a bid to improve management practices. China's leaders are particularly keen to fix its ailing lenders ahead of next year, when foreign banks will finally be allowed to conduct business inside China in local currency. That is expected to pose a grave challenge to domestic lenders, whose managers have been nurtured by decades of state capital infusions and a system governed more by personal connections than consideration of the bottom line. The most recent additions to a lengthy roster of bank-fraud cases brings to the fore a basic question about the future of China's financial system: Are the state disclosures a sign that the government is indeed serious about fixing the troubles, or just another indication of the extent of the problems in a fundamentally shaky system? Analysts saw a little bit of both. While the state is indeed intent on a fix, the challenges are deep. "This case that has emerged at the Agricultural Bank of China is just a minor one among the overall problems with China's state owned banks," said Yi Xianrong, a director at the China Academy of Social Sciences' financial research institute in Beijing. "Lots more such cases are not discovered and will be discovered sooner or later, as the most serious problems involve medium- and long-term loans." Advertisement He cited deep institutional problems at the banks, including a lack of internal controls. "More fundamentally, the system appoints bank leaders based on administrative power rather than on market performance," Yi said. "Real changes have yet to come." For foreign investors, the stakes tied to reform are high. Last year, Bank of America paid $3 billion for a 10 percent stake in the Bank of China, with the Royal Bank of Scotland taking another 10 percent of that lender. This month, Bank of China raised some $9.7 billion through a stock offering of stock in Hong Kong, following a $9.2 billion stock offering there by China Construction Bank. Last August, Goldman Sachs Group Inc. sank $3 billion into China's largest lender, the Industrial & Commercial Bank of China, capturing a 10 percent stake. The bank has said it will pursue a stock offering worth some $12 billion in Hong Kong sometime this fall. Foreign investors are eager to lock up stakes of banks in China's huge, sizzling economy. With stock and bond markets still in their infancy, China's four largest state banks essentially dictate where capital goes in China. But the foreigners are sinking their money into a financial system that has traditionally functioned more as an artery of cash for companies owned by the Communist Party-led government then as careful arbiters of risk and reward. Private economists estimate that China's banks are now choked with $500 billion in bad loans, making the system vulnerable to a shock. Those worries have heightened in recent weeks with the release of government data showing a surge in lending during the first five months of the year, despite government caps on investment in red-hot sectors such as real estate and automobile manufacturing. On Tuesday, the debt rating agency Standard & Poor's underscored those concerns, declaring that China's banks face "increasing vulnerability" from the widening volume of lending. The agency credited China's banks with some improvements in their governance, but stressed that "their developing credit and risk management systems are likely to be severely stretched by rapidly changing economic conditions." i Mail Tribune Home | Local News | Sports | Business | Obituaries | Life | Opinion AP News | Archives | Site Map | Community | Classified Copyright © 1997-2006 Mail Tribune, Inc. All rights reserved. Privacy Policy | Terms & Conditions | Website Feedback www.bingo.com Home Security Systems Trunks, Footlocker Custom Build Computers Discount Hotel Reservations --> online casinos news Ashley Furniture HomeStore Send Flowers California Casinos GMAT Prep Windermere Van Vleet Sports Equipment Entertainment Guide --> Online Casino Fundraisers Sudoku Online Casinos Canada Online Casino Reviews Advertisements Advertisement