Something Is Rotten in China's Banks

As America focuses on the problems at Enron, there's another financial scandal gathering attention on the other side of the globe. Wang Xuebing, who had headed China's second-largest bank, the Bank of China, has been detained on suspicion of corruption in connection with a questionable $23 million loan linked to his wife. The investigation of such a highly regarded executive, which could lead to the death penalty, has sent tremors through the Chinese financial community.

But Wang Xuebing's downfall also serves as an illustration of the appalling lack of managerial controls in the Chinese financial sector. China still is trying to run an increasingly large and sophisticated financial system with fewer controls than the proprietor of a corner candy store would have. The result is large-scale thefts by bank employees, including the possible embezzlement of up to $480 million at a single branch by several Bank of China branch managers between 1992 and 2001.

The scale of the bank thefts raises serious questions about China's ability to manage the transition to more of a law-based market economy. Moreover, the crimes raise some worrying doubts about the Bank of China's plan to raise as much as $5 billion through an initial public offering of shares in its Hong Kong and Macao operations. This offering is expected to be listed on the New York Stock Exchange later this year.

It will be up to the underwriters of Bank of China's IPO--Goldman Sachs & Co., UBS Warburg, and the bank's own investment-banking arm--to explain to investors just what sorts of safeguards have been put in place to prevent the proceeds of the IPO from being diverted into corrupt pockets. The spotlight should also shine on Hong Kong regulators. This is the third substantial scandal involving a top official at a mainland-controlled bank in Hong Kong in recent years. Certainly, Hong Kong has more competent financial regulators than those on the mainland. However, Hong Kong is going to have to do a lot better if it wants to avoid gaining a reputation as a place that is soft on white-collar criminals, especially those crooks who have strong political connections on the mainland.

For China, it's encouraging that Beijing is pursuing this case to the top. But the occasional high-profile arrest and periodic clean-ups that characterize the country's anticorruption efforts aren't going to build a modern financial system. That will require a sustained effort and independent judges, accountants, and regulators. Moreover, China needs independent media to keep a close watch on businesses and government agencies.

Economic reform can't be separated from political openness. China's leaders often say that its people aren't ready for democracy. But the real question is: Can the people afford to wait while their country is ripped off by corrupt executives and officials?

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