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James Turk: Gold bounces off support
12:41a ET Tuesday, June 7, 2005
Dear Friend of GATA and Gold:
The Washington Post story appended here, noted by Bill
King in today's edition of The King Report
(BillKing@thekingreport.com), seems to offer two big
lessons:
First, China's banking system shares all the corrupt
devices of the banking system of the United States
and may be even more corrupt.
And second, while gold and silver are hardly the only
forms of money, when your banking system is as
corrupt as this you might want to have a good deal
of both safely stashed away somewhere: your
basement, your back yard, a vault in London or
Switzerland, or the moon or Mars -- at least until
the real estate bubble gets there.
Perhaps no one knows this better than the Chinese
themselves.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
China's Unyielding Banking Crisis;
Corruption and Cronyism Often Thwart
Efforts to Eradicate Bad Debts
By Peter S. Goodman
Washington Post
Monday, June 6, 2005
http://www.washingtonpost.com/wp-
dyn/content/article/2005/06/05/AR2005060500958.html
CHENGDU, China -- As he rose through the ranks at China's largest
lender, Zhang Guilin helped build the bad debt crisis plaguing his
country's banks, the gravest threat to this fast-growing economy.
Zhang directed funds to cronies and political allies, authorities
here say, adding to a national toll of bad loans estimated at $500
billion.
Five years ago, Zhang was given a job as head of the local office of
a new government-formed company charged with cleaning up the very
financial mess he helped create. The new company took over the bad
debts at his old bank and tried to recover what it could by selling
off the properties pledged as collateral.
This asset-recovery company was supposed to help nurture a new era in
China's financial system. Instead, the campaign to fix China's banks
is foundering on the same cronyism and corruption that created the
debt crisis.
According to those familiar with a state corruption probe, Zhang sold
many of the assets under his control, including an apartment complex
and hotel on a Chinese resort island and a 30-story office tower in
the center of this city, to friends and relatives at sweetheart
prices, justifying the deals by using an auction company owned by a
long-time associate.
As China continues its transition from communism toward an
increasingly freewheeling capitalism, central government officials
are consumed with eradicating bad debts and building healthy banks,
with foreign money slated to play a major role. Over the next two
years, China plans to raise tens of billions of dollars to help write
off bad debts by selling shares in its largest state lenders on stock
markets in New York and Hong Kong.
But the story of Zhang Guilin highlights the risks confronting
foreign investors as they jockey for a piece of these deals. It shows
how endemic inside-dealing remains in a Chinese banking culture that
has long run on personal relationships, the ease with which brazen
corruption can evade the scrutiny of regulators and the difficulty of
assessing the net worth of any financial institution in China.
"A lot of the management people have been taken directly from the
banks," said Yu Nanping, a banking expert at East China Normal
University in Shanghai. "They are disposing a lot of the bad loans
they created before, and they are covering up a lot of corruption
cases."
Zhang headed the Sichuan branch of Huarong, one of four state-owned
asset management companies created to restructure deadbeat borrowers
and sell off collateral to erase bad debts. These companies were
patterned after the Resolution Trust Corp., the company created in
the United States after the savings and loan debacle of the 1980s,
which left taxpayers on the hook for an estimated $180 billion.
China's state banks transferred nearly $170 billion in bad loans to
the asset management companies in 1999 and 2000, then added $50
billion last year. Last month Zhang's old bank, the Industrial and
Commercial Bank of China, signed an agreement that will transfer $30
billion more in bad loans to Huarong. By the end of 2004, the four
firms had collectively written off or sold assets worth about $80
billion, according to state figures. They recovered only 20 percent
of the face value of their loans. The state audit office recently
disclosed 38 cases of embezzlement and fraud at the asset management
companies, involving more than $800 million.
Zhang is now jailed at the Public Security Bureau in Chengdu,
according to sources familiar with the probe. Officials at Huarong
and ICBC declined to speak publicly. This account is based on
documents filed in Sichuan and Hainan provinces, interviews with four
current and past officials at ICBC, real estate developers, auction
companies and two sources familiar with the corruption probe.
Zhang grew up on the muddy banks of the Yangtze River, in a city
called Wanxian. His parents scratched out a living at a market stall.
After graduating from high school in 1963, he took a job at what was
then the nation's only bank, the People's Bank of China.
In 1984, as the government split off new banks, Zhang took a position
at the freshly minted Industrial and Commercial Bank of China. The
next year, he became the head of the Wanxian special region office,
which supervised branches in an area of nearly 9 million people.
Zhang's office had no computers, no air conditioning and primitive
toilets. He earned about $12 per month. But Zhang parlayed his
position into an ascendant career. He regularly tapped bank funds to
entertain associates, dining with the Wanxian mayor and party
secretary, former colleagues say, and he lent to the local factories
they favored.
On several occasions, colleagues and angry managers at factories who
failed to secure credit wrote letters to provincial officials
accusing Zhang of taking kickbacks, according to three former
colleagues and a source familiar with the corruption probe. Each
time, Zhang enlisted the support of local officials to scotch any
investigation.
In 1992, Zhang engineered a transfer to Yibin, farther up the
Yangtze. It was at best a lateral move. Yibin was much smaller than
Wanxian. But it was also closer to the provincial capital, Chengdu,
and it gave Zhang direct responsibility for approving more loans.
Local governments were then tapping state banks for capital to invest
in real estate deals. In 1993, Zhang handed a firm controlled by the
Yibin city government about $33 million for projects around the
country.
Zhang "didn't care how many projects there were, and there was no
collateral," a former colleague said.
Reports of kickbacks again brought Zhang cross-wise with supervisors,
but useful friends snuffed out trouble. Among his most important
guardians was Xie Shijie, a former Sichuan province party secretary,
former bank officials said. Zhang ensured that a steady diet of
credit kept flowing to a loss-making factory run by the party
secretary's son. Xie has retired from public office and did not
respond to messages.
This relationship played a critical role in elevating Zhang to vice-
chief of the ICBC branch for Sichuan province, a post he assumed in
1998. The job brought him to Chengdu, famed for its spicy food and
teahouses. Two years later, Beijing created Huarong, the asset
management company, and hired Zhang to run its Sichuan branch.
All over China during that time, previously unthinkable fortunes were
being made by anyone with access to property. Zhang, then five years
away from the mandatory retirement age of 60, recognized that this
was his last opportunity to enter the ranks of the rich, say his
former colleagues. He was then making only $200 a month, though the
bank provided an apartment and a chauffeured Audi sedan.
As investigators craft a criminal case against Zhang, two projects on
the resort island of Hainan in the South China Sea are occupying a
prime position in the probe. Americans best know Hainan as the scene
of a stand-off between Beijing and the Bush administration over the
fate of a U.S. reconnaissance plane that crash-landed there in 2001.
Within China, it is synonymous with a disastrous early 1990s real
estate bubble that left half-built skeletons towering lifelessly over
the sea.
In the Hainan city of Sanya, a $5 million loan from ICBC built the
Golden Bay Garden, a complex of 12 eight-story apartment towers set
on a bay. That loan went bad, and the property was transferred to
Huarong's Sichuan branch. Four years ago, Huarong sold the property
for a mere $1 million to Sanya Southeast Real Estate, a company
controlled by one of Zhang's long-time associates. That was less than
half of its real value, sources familiar with the probe said. A few
weeks later, Sanya Southeast flipped the property to another
developer for more than $2 million, doubling its money.
In 2003, Huarong sold another failed Hainan property, the Shuhai
Hotel, to a company controlled by another long-time associate of
Zhang's, according to sources familiar with the probe. Though the
project was worth about $6 million, Huarong sold it for only $60,000.
Investigators are also probing Zhang's handling of a 30-story office
tower in the center of Chengdu called Tianyi Plaza. The original
developer, Cai Wenbing, said in an interview that he struck an
agreement with ICBC to jointly develop the property in 1993, but the
bank failed to deliver its promised $10 million. Documents confirm
Cai's account, revealing that the bank then extended him a loan for
the money and promised he would never have to repay it. But when
Zhang took over Huarong, he disregarded that promise, suing Tianyi
Group at the Third Civil Court of the Sichuan High People's Court
seeking the return of the loan and persuading a judge to halt
construction.
The following January, Huarong sold Tianyi Plaza to the lawyer
representing the bank, Zhang Xuefeng, for only $4 million, which was
a fraction of its worth, Cai said.
In April 2002, the Sichuan court ruled in Huarong's favor. Cai an
appealed. He said that later that spring, he got a call from
Huarong's lawyer seeking settlement talks.
According to Cai, the lawyer boasted: "We succeeded because we bribed
the judge," adding that after buying Tianyi Plaza from Huarong for $4
million, he had immediately sold it to another developer for $9
million. "He said, 'We'll give you [about $600,000] and we'll give
you a passport and you go to America and shut your mouth,' " Cai said.
The lawyer has fled Chengdu, according to sources familiar with the
probe. The judge declined to comment. The case is tied up in court.
Zhang retired from Huarong last fall. But by then, the investigation
that now has him behind bars was already underway. On February 5,
state security agents found him at one of his seven Chengdu area
residences and took him away.
----------------------------------------------------
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