Twelve months ago, Beijing stunned the international business community by shutting down Guangdong International Trust and Investment Corp (Gitic) for inability to repay debts, which amounted to 38.77 billion yuan (about HK$36.18 billion). After three months' wait, international lenders were dealt another blow with news that Gitic had filed for bankruptcy without Beijing's pledge of full repayment, given in previous similar cases. With their fingers burnt, foreign lenders flocked to recall loans from mainland companies as indiscriminately as they had rushed to lend during good times. It triggered a debt crisis among mainland firms and other Itics which is far from over. The Gitic saga has served as a painful reality check of how things can go wrong with even a long-established government-backed company in the transition from a planned to a market economy. It has revealed long-standing weaknesses and malpractices in the existing system. It has also underpinned the urgent need to shift from name lending to commercial lending, to stick to rules that protect rights and interests and to have sound corporate governance. The widespread practice of name lending has come under severe challenge in the Gitic aftermath. Foreign banks have defended themselves by saying meaningful credit analysis was impossible, given the poor accounting practices and low transparency among mainland corporates. But these were no excuse for lenders not to exercise every possible means to protect their own interests. 'If there is a will to lend, there must be a way [to manage risks],' said Louie Choi, a partner at auditors KPMG which assisted in Gitic's liquidation. He cited the example of Hong Kong during the 1980s when bankers required borrowers to pledge properties as security for loans, and to have their accounts audited by recognised auditors to minimise risks. 'If lenders find the risks unmanageable, they should not lend at all,' noted Mr Choi, saying it explained why some banks were missing in the long list of Gitic's creditors. The Gitic debacle, the mainland's largest financial failure and bankruptcy, has struck out the assumption in mainland lending that there was an implicit guarantee from the government to bail out beleaguered state-owned enterprises. Not only has Beijing refrained from going to Gitic's rescue, but it has barred the Guangdong provincial government from doing the same. Without government aid, Gitic lenders stand to receive less than 17 cents on a dollar, according to liquidation committee estimates. Observers said the Gitic incident has shown Beijing's resolve to let law take precedence over 'Chinese characteristics' in weeding out irregularities in the financial sector. However, lawyers have cautioned that the mainland's bankruptcy law and judicial system do not provide adequate protection of creditor rights. Gordon Chang, counsel to legal firm Paul, Weiss, Rifkind, Wharton & Garrison in Beijing, said: 'It is very difficult for creditors to put a state-owned enterprise into bankruptcy under bankruptcy law. 'The bankruptcy law has even been used as a shield by bad borrowers against creditors, not just foreign creditors but also creditors from other parts of China.' Mr Chang also said it was hard to get a judgment which was fair to all parties and beneficial to the society as a whole. 'Because the judicial system doesn't enforce creditor rights, it encourages borrowers to default. Therefore, borrowers are not honouring their obligations,' he said. The absence of sufficient legal protection adds greater importance to understanding the credit risk of an individual company. At the core of the Gitic failure were wrong investment decisions, gross mismanagement, rampant business malpractices, and possibly even corruption. The extent of the irregularities is shown in the fact that over half of Gitic's 3.2 billion yuan foreign debts were not registered with the State Administration of Foreign Exchange, as required. Foreign banks with unregistered debts face bigger losses. Goldman Sachs (Asia)'s executive director, Fan Jiang, said the problem with Itics was that there had been regulations that were not enforced. 'The by-product of [the Gitic incident] is that it demands regulators and the Chinese Government to be a lot more vigilant in enforcing rules and regulations,' he said. While foreign banks would be forced to lend based on commercial merit, mainland companies would also be forced to be more vigorous in maintaining constructive balance sheets to avoid being leveraged too aggressively, he added. As the dust settles on Gitic and the US$5.59 billion liabilities restructuring for fellow investment arm Guangdong Enterprises (Holdings), mainland lending will gradually come back to life, hopefully on a healthier footing. After all, the mainland is a vast, rapidly developing market that foreign lenders do not want to miss.