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.

Zhang's office had no computers, no air conditioning and primitive toilets. He earned about $12 per month. But Zhang parlayed his position into an ascendant career. He regularly tapped bank funds to entertain associates, dining with the Wanxian mayor and party secretary, former colleagues say, and he lent to the local factories they favored.

On several occasions, colleagues and angry managers at factories who failed to secure credit wrote letters to provincial officials accusing Zhang of taking kickbacks, according to three former colleagues and a source familiar with the corruption probe. Each time, Zhang enlisted the support of local officials to scotch any investigation.

In 1992, Zhang engineered a transfer to Yibin, farther up the Yangtze. It was at best a lateral move. Yibin was much smaller than Wanxian. But it was also closer to the provincial capital, Chengdu, and it gave Zhang direct responsibility for approving more loans.

Local governments were then tapping state banks for capital to invest in real estate deals. In 1993, Zhang handed a firm controlled by the Yibin city government about $33 million for projects around the country.

Zhang "didn't care how many projects there were, and there was no collateral," a former colleague said.

Reports of kickbacks again brought Zhang cross-wise with supervisors, but useful friends snuffed out trouble. Among his most important guardians was Xie Shijie, a former Sichuan province party secretary, former bank officials said. Zhang ensured that a steady diet of credit kept flowing to a loss-making factory run by the party secretary's son. Xie has retired from public office and did not respond to messages.

This relationship played a critical role in elevating Zhang to vice-chief of the ICBC branch for Sichuan province, a post he assumed in 1998. The job brought him to Chengdu, famed for its spicy food and teahouses. Two years later, Beijing created Huarong, the asset management company, and hired Zhang to run its Sichuan branch.

All over China during that time, previously unthinkable fortunes were being made by anyone with access to property. Zhang, then five years away from the mandatory retirement age of 60, recognized that this was his last opportunity to enter the ranks of the rich, say his former colleagues. He was then making only $200 a month, though the bank provided an apartment and a chauffeured Audi sedan.

As investigators craft a criminal case against Zhang, two projects on the resort island of Hainan in the South China Sea are occupying a prime position in the probe. Americans best know Hainan as the scene of a stand-off between Beijing and the Bush administration over the fate of a U.S. reconnaissance plane that crash-landed there in 2001. Within China, it is synonymous with a disastrous early 1990s real estate bubble that left half-built skeletons towering lifelessly over the sea.

In the Hainan city of Sanya, a $5 million loan from ICBC built the Golden Bay Garden, a complex of 12 eight-story apartment towers set on a bay. That loan went bad, and the property was transferred to Huarong's Sichuan branch. Four years ago, Huarong sold the property for a mere $1 million to Sanya Southeast Real Estate, a company controlled by one of Zhang's long-time associates. That was less than half of its real value, sources familiar with the probe said. A few weeks later, Sanya Southeast flipped the property to another developer for more than $2 million, doubling its money.

In 2003, Huarong sold another failed Hainan property, the Shuhai Hotel, to a company controlled by another long-time associate of Zhang's, according to sources familiar with the probe. Though the project was worth about $6 million, Huarong sold it for only $60,000.

Investigators are also probing Zhang's handling of a 30-story office tower in the center of Chengdu called Tianyi Plaza. The original developer, Cai Wenbing, said in an interview that he struck an agreement with ICBC to jointly develop the property in 1993, but the bank failed to deliver its promised $10 million. Documents confirm Cai's account, revealing that the bank then extended him a loan for the money and promised he would never have to repay it. But when Zhang took over Huarong, he disregarded that promise, suing Tianyi Group at the Third Civil Court of the Sichuan High People's Court seeking the return of the loan and persuading a judge to halt construction.

The following January, Huarong sold Tianyi Plaza to the lawyer representing the bank, Zhang Xuefeng, for only $4 million, which was a fraction of its worth, Cai said.

In April 2002, the Sichuan court ruled in Huarong's favor. Cai an appealed. He said that later that spring, he got a call from Huarong's lawyer seeking settlement talks.

According to Cai, the lawyer boasted: "We succeeded because we bribed the judge," adding that after buying Tianyi Plaza from Huarong for $4 million, he had immediately sold it to another developer for $9 million. "He said, 'We'll give you [about $600,000] and we'll give you a passport and you go to America and shut your mouth,' " Cai said.

The lawyer has fled Chengdu, according to sources familiar with the probe. The judge declined to comment. The case is tied up in court.

Zhang retired from Huarong last fall. But by then, the investigation that now has him behind bars was already underway. On February 5, state security agents found him at one of his seven Chengdu area residences and took him away.

Special correspondent Eva Woo contributed to this report.

Ownership of the Golden Bay Garden, a complex of 12 apartment towers, was transferred for $1 million, or half its real value, and then resold for $2 million.