Tuesday, June 27, 2006

The NAO has apparently discovered another series of frauds and illegal lending in the ABC. That in itself is not surprising. At the end of 2005, ABC still had NPL ratio of over 26%, much higher than that of the other Big Four banks. What is really disturbing (okay, maybe not) about this is that this comes on top of an additional 1.5% in NPLs discovered during an internal audit last September. In fact the results of this audit had been circulating in official circles since the end of last year, and the government finally decided to release the report. As there is mounting lobbying by the ABC to push forward restructuring, the State Council might be using the release of this report to slow down the impetus for restructuring. This is partly because ABC is far from ready to restructure, much less list. Moreover, the State Council likes to keep the ABC in its current form, completely controlled by the state. This is because the current administration continues to see the ABC as a powerful instrument to provide liquidity for rural development. Although the vicious cycle of government intervention and bank moral hazard is present in the other banks, it is the dominant force that drives ABC.

China Reveals $1.1B Bank Fraud
Corruption Threatens Foreign Investment

By Peter S. Goodman
Washington Post Foreign Service
Tuesday, June 27, 2006; 11:10 AM

SHANGHAI, June 27 -- The Chinese government's disclosure this week of $1.1 billion worth of fraud at one of the country's largest state-owned banks underscores the risks confronting foreign investors and the precarious nature of China's corruption-ridden financial system.

China's National Audit Office on Monday announced that an examination of records at the Agricultural Bank of China -- one of four state-owned giants -- uncovered 51 cases of criminal wrongdoing involving 157 people during 2004. The state audit also found evidence of $1.8 billion in improperly handled deposits, and $3.5 billion in illegal loans.

The latest details of fraud come as China presses to eradicate the taint of corruption from its state-owned banks as it courts foreign capital in a bid to improve management practices. China's leaders are particularly keen to fix its ailing lenders ahead of next year, when foreign banks will finally be allowed to conduct business inside China in local currency. That is expected to pose a grave challenge to domestic lenders, whose managers have been nurtured by decades of state capital infusions and a system governed more by personal connections than consideration of the bottom line.

The most recent additions to a lengthy roster of bank-fraud cases brings to the fore a basic question about the future of China's financial system: Are the state disclosures a sign that the government is indeed serious about fixing the troubles, or just another indication of the extent of the problems in a fundamentally shaky system? Analysts saw a little bit of both. While the state is indeed intent on a fix, the challenges are deep.

"This case that has emerged at the Agricultural Bank of China is just a minor one among the overall problems with China's state owned banks," said Yi Xianrong, a director at the China Academy of Social Sciences' financial research institute in Beijing. "Lots more such cases are not discovered and will be discovered sooner or later, as the most serious problems involve medium- and long-term loans."

He cited deep institutional problems at the banks, including a lack of internal controls. "More fundamentally, the system appoints bank leaders based on administrative power rather than on market performance," Yi said. "Real changes have yet to come."

For foreign investors, the stakes tied to reform are high. Last year, Bank of America paid $3 billion for a 10 percent stake in the Bank of China, with the Royal Bank of Scotland taking another 10 percent of that lender. This month, Bank of China raised some $9.7 billion through a stock offering of stock in Hong Kong, following a $9.2 billion stock offering there by China Construction Bank.

Last August, Goldman Sachs Group Inc. sank $3 billion into China's largest lender, the Industrial & Commercial Bank of China, capturing a 10 percent stake. The bank has said it will pursue a stock offering worth some $12 billion in Hong Kong sometime this fall.

Foreign investors are eager to lock up stakes of banks in China's huge, sizzling economy. With stock and bond markets still in their infancy, China's four largest state banks essentially dictate where capital goes in China. But the foreigners are sinking their money into a financial system that has traditionally functioned more as an artery of cash for companies owned by the Communist Party-led government then as careful arbiters of risk and reward.

Private economists estimate that China's banks are now choked with $500 billion in bad loans, making the system vulnerable to a shock. Those worries have heightened in recent weeks with the release of government data showing a surge in lending during the first five months of the year, despite government caps on investment in red-hot sectors such as real estate and automobile manufacturing.

On Tuesday, the debt rating agency Standard & Poor's underscored those concerns, declaring that China's banks face "increasing vulnerability" from the widening volume of lending. The agency credited China's banks with some improvements in their governance, but stressed that "their developing credit and risk management systems are likely to be severely stretched by rapidly changing economic conditions."

The Agricultural Bank has long been seen as the most flawed of the four state-owned giants. Four years ago, bank officials announced plans to embrace consumer finance as a way of weaning itself off more politically motivated lending. The bank moved aggressively into the fledgling business of auto finance, seeking to profit as China's growing middle class embraces the family car.

In interviews, bank officials then acknowledged that credit checking systems were virtually non-existent in China. They said that so long as would-be borrowers accurately disclosed their addresses and incomes, few applicants would be turned away.

This week's disclosures added to the evidence that the resulting consumer finance frenzy has turned sour: The state auditors said that among the biggest areas of fraud in the cases it discovered were car loans and home mortgages.

"The banks have been desperately expanding loans including consumer loans and real-estate loans," Yi said. "The problem won't be visible until real estate prices fall dramatically, which will happen sooner or later. The problem with individual consumer loans is serious."






  (一)违规经营问题比较突出。主要反映在三方面:一是违规办理存款业务142.73亿元。主要问题是违规使用存款科目、违规开立存款账户,个别单位甚至违规动用客户存款。如,黑龙江分行营业部中山支行利用银行特种转账凭证擅自动用客户存款1.81亿元,用于为其他企业开具银行承兑汇票的保证金和提供虚假出资证明。二是违规发放贷款276.18亿元。主要表现在汽车消费贷款、土地储备贷款和扶贫贴息贷款等方面。如,北京昌平区支行在明知北京日泽丰成经贸有限公司不具备汽车消费贷款担保资格,而且所提供的申请贷款资料内容虚假的情况下,发放个人汽车消费贷款达4.6亿元,其中部分资金被该公司法定代表人霍民挪用到异地投资,截至2005年9月已形成不良贷款1.21亿元。三是违规办理票据业务97.18亿元。农业银行一些基层分支机构对票据业务审核把关不严,存在大量违规操作。如审计抽查河南信阳市分行2004年办理的贴现业务额24.7亿元,其中无真实贸易背景业务额达21.9亿元, 比例高达89%。



  此外,审计还发现农业银行违反财务会计制度问题金额12.67亿元,其中会计核算不实11.82亿元,私设“小金库” 8492.8万元。






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