Beauty parade to expose some ugly truths

PUBLISHED : Tuesday, 27 June, 2006, 12:00am
UPDATED : Tuesday, 27 June, 2006, 12:00am

Last Tuesday the audit teams of PricewaterhouseCoopers and Ernst & Young gathered in Beijing for an accountants' beauty parade.

They were competing for what might seem a dubious prize - conducting the first international audit of the Agricultural Bank of China, the most troubled bank in one of the world's most backward banking sectors. For reasons as yet unknown, rival firm KPMG pulled out of the running on the same day without submitting a bid.

Agricultural Bank has been left on the sidelines while its fellow Big Four banks - Bank of China, China Construction Bank and Industrial and Commercial Bank of China were bailed out by the central government and then restructured. Thus cleaned up, they arranged to sell stakes in themselves to some of the world's biggest financial institutions before preparing to sell shares on domestic and overseas exchanges.

In addition to being allowed to unload massive quantities of non-performing loans on to custom-made assets disposal companies, Hong Kong-listed BOC and Construction Bank each received US$22.5 billion of capital from China's massive foreign exchange reserves in 2003. ICBC early last year received more than US$15 billion in funds and is expected to sell shares in Hong Kong in October.

Thus the decision to invite bids for a full independent audit involving a sample of 45 of Agricultural Bank's 31,000 branches marks a small but potentially significant sign that the central government intends eventually to take it down the same path leading to a bailout and possible sale to investors.

That said, no one, not even the bank's top management, expects a share sale to happen for at least another two or three years. And the bank's financial woes mean it could need a bigger capital injection than its three rivals put together. Even then it could be hard to find foreign strategic investors willing to place a bet on its future. Just training its more than 450,000 employees in even the rudiments of proper commercial banking is a daunting challenge at best.

Government sources say an alternative plan to break the bank up into regional-level entities is still being considered, despite official government denials.

'Breaking up the bank is probably the best solution,' one source said. 'No boss in Beijing can make sure the branches do not make more corrupt and unprofitable loans in Xinjiang, Gansu and Hunan and if it's broken up, the pieces will be easier to sell to strategic and public investors.'

People involved in a preliminary review of the bank's internal systems and processes say it is a morass of old-style central planning attitudes and blatant fraud.

The bank made some efforts at reform: it tried to introduce reporting requirements designed to make branch managers accountable to the head office in Beijing rather than to local party bosses who direct lending to pet projects and their own pockets.

However, these reform efforts have been slow and halting, in part because of anticipation of a bailout.

The 'peasant's bank' still makes about 12 per cent of the loans in China, which increased 2.12 trillion yuan in the first five months. But its official estimated bad loans account for about US$90 billion or about 70 per cent of the Big Four banks' combined US$132 billion in non-performing loans.

'If we never make another bad loan ever again, it would still take us 80 years to lend our way out of the bad loans we already have,' one bank official said privately.

According to rough estimates, the bank is lending an average of 1.5 billion yuan a day. Using its 2005 non-performing loan ratio of 26.17 per cent as a guide, that means the bank is giving away almost 400 million yuan a day to debtors who will never pay it back.