Do you think that state-owned banks in China are doing well? Bloomberg reports that
Agricultural Bank of China, the country’s third-largest lender, had 8.7 billion yuan ($1.09 billion) of irregularities in 2004 including embezzlement and misappropriation, China’s National Audit Office said.
The 51 cases involved 157 bank officials, some of whom conspired with outside parties to embezzle or misappropriate the bank’s funds, the auditor said in a report posted on its Web site today. Its audit, conducted last year, covered the bank’s headquarters in Beijing and 21 branches.
The amounts are staggering. The Washington Post story on this poses an important question:
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?
A side note — the way the system works there — who wouldn’t want to get a loan? Sign me up!
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.
Such scandals do little to improve China’s attractiveness to investors. I have a follow up question to the one above: if the latter is true — that is, if the economy is fundamentally shaky — is anything really being done about it? If not, will investors begin to think twice about putting money in the country, even if it provides access to such a huge market? Will investors no longer ignore some of the inherent issues and will China, as a result, see a decline in investment flows?
I believe that sooner or later, in any investment environment, high risk and instability associated with lack of transparency and corruption outweigh profit motives. Is China reaching the tipping point? Is India bound to take over as the leading destination for FDI? Minxin Pei certainly thinks that China is too much about hype and too little about substance.
Finally, check out this recent story from the Economist on doing business in China (subscription only). This book review comes down to the following conclusion:
…China has the raw material—smart, driven, educated people—it needs to push its high-tech ambitions. Yet managing those people while navigating an opaque bureaucracy and an unpredictable business environment matters just as much as writing code or designing hardware—and will determine whether China can move from the world’s workshop to becoming a serious force in global technology.
Published Date: June 27, 2006