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Chinese reforms entail crackdown

China's latest crackdown on financial corruption is sending a warning to would-be official and corporate profiteers as it pushes a critical overhaul of its bloated and inefficient state enterprises.

Risk analysts say a widening investigation into suspect loans by the Bank of China to embattled property tycoon Zhou Zhengyi zeroes in on local officials as Beijing strives to wring value out of more than US$1 trillion in moribund government assets.

But some said the government would be hard pressed to stamp out fraud and collusion between local officials and corporate chieftains, an endemic practice dating back millennia.

"The Zhou case suggests the government is keen to do something about corruption," said Peter Humphrey, associate managing director at risk consultants Kroll Inc in Hong Kong.

"But China's state enterprises still suffer from the problem of collusion between officials and businessmen, where under-the-table deals and kickbacks are the norm," Humphrey said.

Tackling corruption, a huge but elusive threat to the world's fastest-growing major economy, is crucial as the government seeks to sell or restructure about 11.8 trillion yuan (US$1.43 trillion) in state assets.

Many are expected to end up in private hands.

Beijing spelt out harsh punishments last week for people who abuse state assets, from being blacklisted from top jobs in state enterprises to jail.

Hu Angang, the head of the Center for China Studies, said economic losses from public sector corruption and abuse of power was estimated at a staggering 15 percent of China's annual gross domestic product every year from 1999 to 2001.

Over the same period financial crimes alone, the number one form of corruption, trimmed 6.25 percent off the country's GDP each year.

To combat financial crime, the government is stepping up investigations into property tycoons such as Zhou, China's 11th richest businessman last year according to Forbes magazine.

Real estate mogul Qian Yongwei's Wantai group also found itself under the glare of official scrutiny, state media have reported.

Qian is chairman of Hong Kong-listed Sun Man Tai Holdings, a property investment company whose shares have been suspended since last week over media reports that Qian was under investigation.

The dragnet extends to Bank of China Hong Kong ex-chief executive Liu Jinbao and loans made from its Shanghai branch, which he headed in the 1990s, to Zhou's New Nongkai Global Investments Ltd.

Now it threatens to blow the lid off China's murky property dealings as well, with Zhou accused in a controversial lawsuit of misappropriating state land in Shanghai.

"Fraud is the most under-reported and sometimes unreported crime ... because it is politically sensitive and embarrassing," Humphrey said.

A lack of official scrutiny means local officials often feel free to line their own pockets through state asset sales.

Faced with loss-making state assets encumbered by huge payrolls and poor management, they often try to sell them to finance-savvy entrepreneurs, analysts said.

"They are taking advantage of China's system, not necessarily in a negative way, but they're using the reforms that are going on in China, it looks like, to enrich themselves," said Bob Broadfoot of the Political and Economic Risk Consultancy.

The creation of the State Asset Management Commission super agency in March was intended partly to show the government was serious about tackling graft.
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