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Banking Irregularities In China

Mainland auditors have uncovered more than 61 billion yuan (HK$59.3 billion) worth of irregularities at the Agricultural Bank of China, the country's third-largest state-owned commercial bank. The central government announced Monday that the National Audit Office, during its investigation into the bank's 2004 financial statements, found 51 cases of criminal wrongdoing involving 157 people, with fraud cases totaling 8.7 billion yuan. Auditors also found 14.3 billion yuan in improperly handled deposits and 27.6 billion yuan in illegal loans, along with other irregularities involving another 10.9 billion yuan. Bank employees were found to have embezzled from accounts and altered deposit documents. The majority of fraudulent loans were for automobile and property development financing, with some employees colluding with outsiders to defraud the bank. In one case, 460 million yuan worth of auto loans were made to a Beijing company without proper checks being made over the firm's repayment capabilities. Auditors have been uncovering a string of cases of fraudulent lending and other abuses at China's state-owned banks as they are scrutinized in preparation for selling shares to private investors. So far, the Agricultural Bank of China, which has more than 31,000 branches throughout the mainland, is the only one among the four major state- owned lenders that has not moved toward raising capital by selling shares on foreign stock exchanges.

The Bank of China and China Construction Bank now trade on the Hong Kong stock exchange, while the Industrial and Commercial Bank of China, the mainland's largest lender, is planning a listing later this year. Agricultural Bank - listed by Fortune magazine as one of the World Top 500 companies, with assets at the end of 2004 exceeding four trillion yuan - is considered to be in unusually poor shape, with questionable financial controls and huge portfolio of bad loans. China CITIC Bank, which is eyeing a Hong Kong listing this year, has launched an investigation after a credit officer stole 40 million yuan from a client's account. The employee from the Pudong branch of China's seventh-largest commercial lender by assets allegedly used fake seals to syphon the cash from a fixed deposit of 50 million yuan ahead of its September 2006 expiry.

This brings us to the problematic Chinese banks - easy to criticise but let's get a proper perspective on things. A recent study by Ernst & Young estimated that China's total bad debt liabilities stood at US$911 billion, and not the official figure of US$400 billion touted by the government. Even at US$911 billion, while huge, it is surmountable provided Chinese banks continue to improve on their risk and credit management practices. It would have been a time bomb waiting to explode if the authorities did not open up the bigger banks to foreign shareholdings. The last 3 years have seen numerous foreign banks / government investing agencies / private equity firms buying minority stakes in the bigger Chinese banks - the bigger implication is that by opening up to these new shareholders, Chinese banks would have a much greater chance to manage and whittle down the overall bad debts and eliminate the doomsday scenario. Global investors should be glad that this has basically averted a massive crunch or correction badly needed within China's financial system.

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