Reform on way as China wakes up to banking scandals

At the root of the problem is a banking system with deep-rooted connections to politics

At the root of the problem is a banking system with deep-rooted connections to politics. Bankers in China are expected to lend money to support an array of state initiatives and can find it difficult to turn down political functionaries

Snooth-talking Chinese banker, Mr Wang Xuebing, appeared to have it all. The debonair 50-year-old chief of one of China's big four state banks enjoyed a lavish lifestyle. But, on January 11th, his glittering career suddenly ground to a halt when he was sacked as president of China Construction Bank.

The sacking of Mr Wang in connection with the disappearance of almost $1 billion (€1.14 billion) from state-owned Bank of China, which he once headed, has rocked the country's financial system.

His alleged involvement in the biggest bank corruption case in the Communist era was followed by revelations last week of another scandal involving the disappearance of $84 million from the Shanghai branch of a privately owned bank.

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At the centre of this scandal is a 29-year-old teller, Mr Huang Jin, who, according to state media, lived a free-spending lifestyle for more than four years before police caught him.

Both scandals are major embarrassments for China's financial sector, which has been beset by irregularities over the years. But some good is beginning to come out of all the murky revelations.

The Bank of China scandal has acted as a catalyst for a series of reforms announced this week by the Chinese government's Central Financial Works Committee.

The committee unveiled a series of tough new bank regulations. Under the new rules, a supervisory bureau is to be established within the People's Bank of China, which will increase the number of bank inspections to reduce the risk of irregular activities. If any of the four major state-owned commercial banks report large non-performing loans, they will be inspected immediately.

The committee also approved steps that will result in the partial privatisation of those banks through stock market listings.

Mr Wang was fired from China Construction Bank days before the announcement by the United States Office of the Comptroller of the Currency of the results of a two-year investigation. The probe found widespread misconduct at Bank of China's New York branch between 1991 and 1999, resulting in a $20 million fine. Mr Wang headed the branch from 1988 to 1993.

Mr Wang is accused of having responsibility for unsafe and unsound banking practices. He is said to be under house arrest and has made no comment on the matter since he was fired.

US investigators found that the Bank of China's New York office was run by executives who used its funds to hand out huge loans to friends. The bank then wrote off the loans as losses. Allegations about questionable lending and business practices have resulted in a messy lawsuit between the bank and former clients in New York.

In papers filed in court, claims are made that officers of the bank's New York branch made large loans to well-connected customers with no credit history, and to shell corporations.

The Chinese government has accused Mr Wang of having direct and indirect responsibility for the misconduct. Analysts say, however, that Mr Wang's case is only the tip of the iceberg in a system so riddled with malpractice that many senior bankers do not know when they are breaking the law.

His departure is expected to set the stage for a wider bloodletting in the banking sector. The national auditor has announced that the China Construction Bank will be the target of an extensive probe this year.

But the ripples will spread wider, including possibly to the central bank and its management of the country's foreign-exchange reserves, and could affect the planned listing of the Bank of China's Hong Kong unit this year.

At the root of the problem is a banking system with deep-rooted connections to politics. Bankers in China are expected to lend money to support an array of State initiatives, giving them wide scope for discretionary use of deposits.

While making loans to prop up money-losing state enterprises, many bank managers also redirect millions of dollars for private purposes.

According to a western banker based in Beijing, the problem centres on the fact that senior bankers have such close ties to the government and the Communist Party that they are often not in a position to act independently.

"If a local Communist Party official asks you as head of a bank branch for a loan, it is hard to refuse," he said.

The new regulations announced this week will be worthless unless they go hand in hand with the separation of senior bank positions from local politics, the banker said.

China's savers are becoming restless and angry amid the growing tales of corruption. Currently, state banks hold $894 billion in personal savings .

Under the terms of its entry into the World Trade Organisation, China is committed to allowing foreign banks to operate in China within five years. This should force state banks to use commercial criteria when it comes to giving loans, enabling them to earn profits and to pay depositors the same rates as foreign banks.

Foreign bankers in Beijing agree that Mr Wang would never have lost his job were it not for the US probe. His transfer from the Bank of China in 2000 was a sign that Beijing knew of the problems at the branch. But his defenders suggest he is being held responsible for questionable loans and other shady deals that people in high places pressurised him and other underlings into providing. They say he is now taking the fall for the sins of greed of his political masters.