Talk is always impressive at five-star hotel conference panels, especially when China's banks are the subject. Their governors have an international outlook, wear expensive brand-name suits, speak fluent English, drink good wine and share cigars with their foreign, investment-banker counterparts. But Liu Minkang, chairman of the newly established China Banking Regulatory Commission (CBRC), is not so easily impressed. China's Anti-Corruption Bureau recently announced more than 4,000 cases of state and public asset embezzlement, most involving the financial sector. Mr Liu is busy trying to clean house. He is combining the CBRC's forces with the People's Bank of China (PBOC) and the Ministry of Finance, in establishing an Audit Inspection Committee aimed at countering irregularities. Mr Liu himself is fed up with internal bank corruption and inefficiency which, all too clearly, could bring down the entire system if unchecked. China tackled its non-performing loan problem by transferring 1.4 trillion yuan (HK$1.3 trillion) in such loans, after 1999, from the books of the four largest state-owned commercial banks to asset-management companies. Unfortunately, during this period, state-owned commercial banks racked up another 1.7 trillion yuan in new non-performing loans, primarily made to the real estate sector. China's bank problems are entangled with the real estate schemes of rags-to-riches private tycoons, whose overnight fortunes arose largely from spending bank loans drawn against such projects. Tycoons have duped China's banks by adopting the following five tricks: One, create the appearance of frenzied business activity reinforced by extravagant behaviour. China's bank officials readily trust the appearance of wealth. In a nation infatuated with money, appearances count for everything. Two, doctor corporate books to give a convincing show of high cash-flow turnover. In China, accountants are among the most creative people society has to offer. Three, after bank officials are well wined, dined and sexed-out, the tycoon will ask for a loan. Bribes, such as offering free units in the real estate development being dreamed of, usually close the deal. Four, the loan funds drawn will instead be used by the tycoon to 'fry', or boost, stocks in his own listed company or to acquire more listed companies with borrowed funds, either way increasing the total asset portfolio. The bigger the company looks, the easier it is to convince the government to approve more real estate projects, for which more funds can be borrowed. Five, cash drawn from listed companies may then be used to repay some bank loans, thereby enhancing credibility and making it easier to borrow more funds in a second round, perpetuating the cycle. When the game runs thin in one city, the tycoon shifts activities to another location. An ideal environment for cheating is created by a lack of co-ordination between banks, failure to share information on the credit quality of companies and poor communication between different government departments. Theoretically, it should be difficult for real estate developers to borrow money in China. Regulatory practice requires approvals from three separate bank departments. A borrower must begin by persuading bank officials he has enough collateral to back the loans he needs. A loan application must be approved by the bank's risk management committee before submission to its credit committee. But these committees are often run by the same people, close colleagues working together with linked interests. While different bank committees appear to provide checks and balances, in fact they only split the risk-punting responsibility. The problem comes full circle back to real estate schemes, to which banks have been lending like crazy. The PBOC has given notice it aims to curb such transactions by forbidding commercial banks from financing real estate projects without proper urban planning, construction planning licences or payment of government land transfer fees. This is a sign that Mr Liu means business, since it will crack a cycle. So-called tycoons commonly use borrowed funds to buy such approvals, which are then used to get more loans. Land in many real estate developments has not been legally transferred, meaning banks often lend against black holes. This is the mess which Mr Liu now has to clean up. Laurence Brahm is a political economist and lawyer based in Beijing