The Brewing Financial Nightmare in China

[globali...@my-dejanews.com]

November 4, 1998

Hong Kong bankers are concerned about a brewing nightmare in China -- the
possibility of more defaults on foreign loans by financial institutions on the
mainland. One high-profile company has already been closed down by the
government, after it defaulted on a multi-million dollar payment to U.S.
investors.

The health of China's non-bank financial institutions is weighing heavily on
Hong Kong's international banking community these days. Most of these
mainland companies, known as international trust and investment corporations,
or "ITICs," carry high levels of foreign loans which they may be unable to
pay.

Just how many billions of dollars they owe remains unclear. Investors are
wondering whether they will have to take the losses if the ITICs do not pay
up.

Last month, China's central bank ordered the closure of one of the largest
non-bank financial institutions, called GITIC -- the investment arm of
Guangdong Province in southern China. The company had defaulted on an
interest payment. Analysts Jeffrey Chan estimates it owes $2.5-billion (U.S.
dollars).

"We do not know the full details of the GITIC's problems. Some may be cases
involving bribery of officials. Obviusly this may involve certain kinds of
activity which top officials like Zhu Rongji do not like to see. That's why
he bit the bullet and did the necessary thing to close down GITIC."

Andy Xie, China analyst for the investment bank Morgan Stanley in Hong Kong,
says Beijing has the ability to pay off foreign creditors thanks to its huge
foreign reserves, but he is unsure if that will happen. Still, he praises the
government shut down of GITIC, since it was an open acknowledgement of the
company's troubles.

"The ITICs have been perhaps borrowing a bit too much money in the past. A
lot of it was borrowed without central government approval. The central
government has become more aware of what has happened, and is moving to
contain the risk, and close down a lot of the ITICs, and perhaps more will
come."

Today, more than 250 ITICs function as investment arms of provincial
governments throughout China. Many are headed by politicians, who used their
official status to secure the trust of foreign bankers.

Critics say many of the ITICs' projects are not financially sound. They
believe many of the new power plants, road and real estate developments were
built by the ITICs according to the whims of the local officials who run
them.

The state government in Bejing is now reviewing the books of many of these
firms. Still the international banking community is growing more anxious,
since more closures could add up to big financial losses for them. Four of
the Chinese firms have missed foreign debt repayments in recent months,
prompting credit rating agencies such as Moody's Investor Service and
Standard and Poor's to downgrade ratings for the ITICs.

Mr. Xie sees a potential advantage to the ITICs troubles -- he says the
closures of many of these companies will ultimately benefit China's economy.

"What the Asian crisis has taught us is that if financial institutions are
unsound, the government should move very aggressively, so they do not become
bigger problems in the future. That is what the Chinese government is doing,
to make sure these unsound financial institutions are closed."

Local officials are rushing to reassure creditors that the ITICs they run are
financially sound. An official at the investment arm of Fujian Province
admits international financing has dried up, but he says that his company has
sufficient internal resources. And the Mayor of Shenzhen, just across the
border from Hong Kong, says the city is capable of meeting its international
obligations. Bankers abroad hope these Chinese officials are right.

Global Investing News
http://www.cyberhaven.com/globalinvesting/

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