Monday, June 06, 2005
The Washington Post carried this very interesting and detailed article about an Asset Management Company manager in Chengdu who sold AMC assets at a low price to friends and relative. Strictly speaking, selling NPLs to friends and relative does not add to the overall toll of NPLs; it merely decreases the amount that the government is able to recover. Sadly, selling at a low price to friends and relative is common practice. This guy is just unlucky to be caught, or it seems that his patron is losing power. The problem is that AMCs are given recovery quotas depending on the locality, so in localities endowed with good assets, it leaves them plenty of room to sell below market price because they would still reach the quota. In places with very few good assets, they have no hope of ever reaching the target, so they might as well benefit from selling at a low price to bribers.
By Peter S. Goodman
Washington Post Foreign Service
Monday, June 6, 2005; A01
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.
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.
By Peter S. Goodman
Washington Post Foreign Service
Monday, June 6, 2005; A01
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.
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.
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