CORRUPTION TARNISHES CHINA’S GROWTH
CORRUPTION TARNISHES CHINA’S GROWTH
2005-03-23 at 10:43:00 am #11006
Wave of Corruption Tarnishes China’s Extraordinary
SHANGHAI, March 05- China has been shaken by a
series of large-scale bank robberies in recent years, but they are not the
These are inside jobs: top executives, branch managers, loan officers and
thousands of everyday employees have been running off with billions in
Consider what has happened in just the first two months of 2005. First, a
branch manager at the Bank of China disappeared with more than $100 million in
cash. A few weeks later, dozens of employees of another commercial bank were
arrested for conspiring to steal nearly $1 billion. And then midlevel officials
of the China Construction Bank fled with about $8 million.
There is no word yet whether any of the money has been recovered. But the
chain of events underlines an ugly byproduct of China’s aggressive embrace of a
freewheeling, get-rich-quick form of capitalism: a long-running wave of
corporate and government corruption scandals.
The financial scandal watch gained new prominence last week with news reports
that Zhang Enzhao, the head of the China Construction Bank, resigned after a
lawsuit accused him of having accepted a $1 million bribe from an American
company,alltel information Services.
The bank later issued a statement saying he resigned for “personal
The scandals are by no means limited to banks. Since the early 1990′s,
China’s modern robber barons have focused on all manner of state-run companies.
Brokerage houses, government-controlled investment management firms and dozens
of state-owned companies have been looted of billions, according to government
investigators. The official media are filled with accounts of executives and
public employees accused of embezzling money and sometimes gambling away those
funds at border casinos.
With China awash in speculative money intended to fuel its economic boom,
many corporate executives have turned greedy, and even low-level employees are
engaging in self-dealing transactions and learning how to funnel millions of
dollars into offshore accounts.
“Corruption is pervasive in China,” said Larry Lang, a professor of finance
at the Chinese University of Hong Kong. “A lot of state-owned companies have
been simply stripped clean.”
Few experts say that the scandals will slow China’s roaring economic growth
anytime soon. But economists and government officials worry that the glaring
examples of fraud, bribery and embezzlement could badly hinder the development
of the nation’s banking and financial systems, which desperately need to be
modernized for China to become a full-fledged economic superpower.
In the last four years, at least 25 government officials have been sentenced
to death for accepting bribes and kickbacks. Hundreds more are serving lengthy
But every month, the number of fraud cases seems to mushroom. Two weeks ago,
the government announced that 58,000 people had been punished for
misappropriating money or making unauthorized loans at just two of the big four
state-owned banks. In 2003 alone, officials said that the equivalent of nearly
$8 billion was pilfered from state-owned enterprises.
In many ways, the corruption scandals offer a telling glimpse into the darker
side of China’s remarkable ascent. Though the economy is soaring, incomes are
rising (per-capita income grew to $1,100 in 2003, the last year figures are
available) and foreign investment continues to flood into the coastal provinces,
China’s finances are in a mess.
The benchmark Shanghai stock index is down about 40 percent over the last
four years. Nearly half the nation’s 130 brokerage houses are insolvent. And the
biggest banks are weighed down by enormous debts.
“The financing system that supports China’s economic growth is very fragile,”
said Sun Lijian, a professor at Fudan University in Shanghai. “People are often
impressed by the look of cities like Beijing and Shanghai, or with the G.D.P.
growth every year. But without a strong financing system, China’s economic
growth is unhealthy.”
Experts say that weak regulation and oversight, deep-seated government
corruption and poor risk-management practices are to blame for allowing fraud
artists and looters to run off long before investigators discover that anything
“The incompleteness of the legal system provides an environment in which some
people are willing and able to take chances to do illegal things,” said Zhou
Chunsheng, a Beijing University professor.
One industry plagued by scandal is also the one that holds everyone’s cash:
the state-run banks, which had bad loans valued around $204 billion last year,
according to McKinsey & Company, the consultants.
Part of this results from greed at the top. In recent years, two high-ranking
executives who worked at the Bank of China were sentenced to long prison terms
for economic crimes. And in 2002, the Bank of China discovered that $500 million
was missing from accounts after three of its bankers fled the country.
Hoping to prepare for foreign competition, some of the largest banks are
trying to revamp their operations and tighten controls. The government helped by
dipping into its huge foreign currency reserves last year to wipe out some $22.5
billion in bad loans at the Bank of China and the China Construction Bank.
Some of the worst-performing loans were taken over by state asset management
companies. But they, too, are in trouble. In January, the government said four
big state-run asset management companies engaged in illegal practices that
involved $800 million.
Brokerage firms are in worse shape, with at least $20 billion in debt on
their books. Many were poorly managed and undercapitalized when they began
dealing in shares for investors in the 1990′s, experts say. But for a while,
those problems were masked by rising stock prices.
When prices began to fall in 2001, a lot of brokerage houses ran aground –
accused of gambling with investors’ funds, investing in pet real estate projects
that devoured money, and siphoning off large amounts into private or offshore
accounts. With lawsuits piling up, more than a dozen brokerage firms have been
seized by regulators in the last two years.
Part of the problem, experts say, is the poor state of the stock markets,
which many liken to casinos. The Shanghai and Shenzhen stock exchanges, where
1,300 companies are listed, most state-run, are just over a decade old. Traders
and experts complain about ineffective regulations, trading restrictions, a lack
of transparency with listed companies and a disconnection between corporate
profits and stock prices.
“Here, earnings are irrelevant,” said Song Fengming, a professor at Qinghua
University in Beijing. “Even if the performance is the worst, the stock price
can still go up. And vice versa. Investors think the market is an A.T.M.
In the last year, regulators have pressed hard to shore up the flagging stock
market. Nonetheless, over the last four years, the Shanghai Stock Exchange has
the worst-performing major stock index in the world.
That the economy could be sizzling hot and the market sharply lower during
much of the last few years is an oddity not lost on industry officials or small
“Why is G.D.P. going up and the stock market going down?” asked an official
at Gold State Securities who insisted on being identified only as Li. “That’s
why investors won’t come here.”
Few investors seem to trust public companies created out of state
enterprises. In one of the latest examples of fraud, three senior executives,
including the chairman and chief financial officer at the Yili Corporation, a
big dairy company, were arrested on suspicion that they had embezzled $50
Can fraud here compare to cases in the United States, like those of eron or worldcom the American companies were bigger, but
analysts say that corporate fraud in China is far more routine and pervasive
than in the West. “The concept of an arm’s-length transaction or arm’s-length
dealings are relatively new concepts in China,” said Chen Zhiwu, a finance
professor at the Yale School of Management.
According to a study conducted by Beijing University, about 16 percent of the
companies listed on the Shanghai and Shenzhen exchanges over the last decade
were subjected enforcement actions like fines or trading suspensions compared
with 2 percent in the United States.
Professor Song at Qinghua University said he abandoned a research project
with Standard & Poor’s to rate state-owned companies because so many
financial statements were not believable. Until that changes, China will find it
tough to join the economic front ranks.
“If China doesn’t have a strong and stable financial system,” said Din
Jianping at the Shanghai University of Finance and Economics, “the economy of
the entire country won’t be very stable.”