China's Unyielding Banking Crisis
Monday, June 6, 2005
CHENGDU, China -- As he rose through the ranks at China's largest lender, Zhang Guilin helped build the bad debt crisis plaguing his country's banks, the gravest threat to this fast-growing economy. Zhang directed funds to cronies and political allies, authorities here say, adding to a national toll of bad loans estimated at $500 billion.
Five years ago, Zhang was given a job as head of the local office of a new government-formed company charged with cleaning up the very financial mess he helped create. The new company took over the bad debts at his old bank and tried to recover what it could by selling off the properties pledged as collateral.
This asset-recovery company was supposed to help nurture a new era in China's financial system. Instead, the campaign to fix China's banks is foundering on the same cronyism and corruption that created the debt crisis.
According to those familiar with a state corruption probe, Zhang sold many of the assets under his control, including an apartment complex and hotel on a Chinese resort island and a 30-story office tower in the center of this city, to friends and relatives at sweetheart prices, justifying the deals by using an auction company owned by a long-time associate.
As China continues its transition from communism toward an increasingly freewheeling capitalism, central government officials are consumed with eradicating bad debts and building healthy banks, with foreign money slated to play a major role. Over the next two years, China plans to raise tens of billions of dollars to help write off bad debts by selling shares in its largest state lenders on stock markets in New York and Hong Kong.
But the story of Zhang Guilin highlights the risks confronting foreign investors as they jockey for a piece of these deals. It shows how endemic inside-dealing remains in a Chinese banking culture that has long run on personal relationships, the ease with which brazen corruption can evade the scrutiny of regulators and the difficulty of assessing the net worth of any financial institution in China.
"A lot of the management people have been taken directly from the banks," said Yu Nanping, a banking expert at East China Normal University in Shanghai. "They are disposing a lot of the bad loans they created before, and they are covering up a lot of corruption cases."
Zhang headed the Sichuan branch of Huarong, one of four state-owned asset management companies created to restructure deadbeat borrowers and sell off collateral to erase bad debts. These companies were patterned after the Resolution Trust Corp., the company created in the United States after the savings and loan debacle of the 1980s, which left taxpayers on the hook for an estimated $180 billion.
China's state banks transferred nearly $170 billion in bad loans to the asset management companies in 1999 and 2000, then added $50 billion last year. Last month Zhang's old bank, the Industrial and Commercial Bank of China, signed an agreement that will transfer $30 billion more in bad loans to Huarong. By the end of 2004, the four firms had collectively written off or sold assets worth about $80 billion, according to state figures. They recovered only 20 percent of the face value of their loans. The state audit office recently disclosed 38 cases of embezzlement and fraud at the asset management companies, involving more than $800 million.
Zhang is now jailed at the Public Security Bureau in Chengdu, according to sources familiar with the probe. Officials at Huarong and ICBC declined to speak publicly. This account is based on documents filed in Sichuan and Hainan provinces, interviews with four current and past officials at ICBC, real estate developers, auction companies and two sources familiar with the corruption probe.
Zhang grew up on the muddy banks of the Yangtze River, in a city called Wanxian. His parents scratched out a living at a market stall. After graduating from high school in 1963, he took a job at what was then the nation's only bank, the People's Bank of China.
In 1984, as the government split off new banks, Zhang took a position at the freshly minted Industrial and Commercial Bank of China. The next year, he became the head of the Wanxian special region office, which supervised branches in an area of nearly 9 million people.