Scandals Place Global Spotlight on Bank of China

What started with a local gossip magazine’s investigation of a celebrity land deal in Southern California has wound up tarnishing the image of the mainland’s leading financial institution, the Bank of China.

The scandal has toppled one of the stars of the Chinese business world, resulted in a civil penalty for the bank and raised questions about China’s ability to crack down on corruption now that it’s a member of the World Trade Organization.

The central figure in the affair, Wang Xuebing, is a protege of Premier Zhu Rongji, and the scandal offers a rare look at the inner workings of China’s state-controlled financial system.

In the 1990s, Wang was hailed as an example of the country’s new elite. He was handpicked by Zhu in 1993 to head the Bank of China--a job he held for most of the decade. Westernized, reform-minded and English-speaking, he seemed to be the state-owned bank’s best hope for reinventing itself for the global economy.

Last month, however, Wang was fired as head of the China Construction Bank, where he had been transferred about two years ago. According to auditors in China and the United States, the Bank of China had misallocated millions of dollars under his watch.

Among the questionable actions was a $23-million loan uncovered by Hong Kong weekly Next Magazine in 1995.

“We knew there’s a tremendous amount of hanky-panky going on in China, and the corruption goes all the way to the top,” said Next Magazine Publisher Yeung Wai Hong.

According to the magazine, a Taiwanese singer and his actress wife had bought 26 parcels of land in Riverside County for $1.65 million. They used the land to secure a loan from the Bank of China’s Los Angeles branch for $23 million.

They received the loan allegedly because of a cozy relationship with Wang’s wife, Zong Lulu, who later acquired a stake in the property.

“If she wasn’t his [Wang’s] wife, then she wouldn’t stand a chance of getting that kind of money,” Yeung said.

The $23 million was never repaid by the borrowers. Instead, investigators later confirmed, the bank’s New York branch made up the shortfall.

The bank initially dismissed the allegations and threatened to sue the magazine over the report. Bank officials said the publication had no credibility, partly because its owner, Jimmy Lai, is a known China basher.

But last month, the U.S. Office of the Comptroller of the Currency announced it had completed a two-year investigation and uncovered numerous cases of misconduct during Wang’s tenure. Chinese banking authorities agreed to pay a $20-million penalty to both U.S. and Chinese regulators.

In a much bigger case that’s still unfolding, authorities are investigating the theft of $480 million from a branch in Guangdong, China, over the course of a decade and are looking for branch employees who allegedly fled to Canada with about $73 million. Wang had been their supervisor.

The timing of the evolving scandal probably could not be worse.

China is in its first year as a member of the WTO and must prove it can rein in rampant corruption. In addition, the Bank of China’s Hong Kong subsidiary is planning to go public and have its shares listed on the New York and Hong Kong stock exchanges. That would be a first for a Chinese state bank.

Some China observers said this airing of dirty laundry, as embarrassing as it is, could help the bank’s proposed initial public offering. It demonstrates Beijing’s resolve to eliminate bad elements, no matter how well-connected to top Communist leaders they may be.

But others worry that the scandal is another reminder that state-owned enterprises in China might be risky investments. To these observers, the lack of checks and balances and the meddling of the Communist Party are signs that such businesses can never achieve true independence or make profits.

Chinese banks, in particular, are notorious for nonperforming loans. They are burdened with having to support bankrupt state-owned companies with sums that often are not repaid.

The Bank of China is supposed to be the best managed of the nation’s four major state banks. Its Hong Kong subsidiary’s bad loan rate is about 30%, compared with what is believed to be 40% or more for other Chinese banks. But that is still far above the roughly 6% average for banks in the former British colony.

“We shouldn’t be too surprised somebody took $20 million here or $70 million there. It’s just part of the system,” said Gordon G. Chang, an American lawyer and author of “The Coming Collapse of China.”

Reform is critical, analysts said, to maintain the confidence of China’s depositors, who have had little choice but to keep nearly $1trillion of their savings in state-owned banks.

Under terms of its entry into the WTO, China’s banking sector must be opened to foreign competition within five years.

Meanwhile, the country is in the midst of a political power struggle. Beijing is preparing for a major changing of the guard this fall, when the country’s top brass, from president to premier, will be replaced.

New leadership in Beijing is likely to trigger more probes of corruption, analysts said.

“There will be more and more scandals this year,” said Lam Pun Lee, economics professor at Hong Kong Polytechnic University. “The different factions within the party will use the media to gain support and create a negative picture of the other side.”