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Concerns Raised over Governance at Bank of China

  • Luis Ramirez

The suspected embezzlement of more than $120 million at a Bank of China branch in northeastern China is raising new questions about governance of the country's state-owned banks.

State media had reported the two bank officials were believed to have fled the country after they were allegedly involved in the disappearance of one billion yuan, more than $120 million from a branch of the Bank of China in the northeastern city of Harbin.

The case, and others like it, have raised questions about China's ability to govern its banking practices at a time when major state-owned banks are preparing to begin listing on overseas stock markets later this year.

Frank Song heads the Centre for China Financial Research at the University of Hong Kong. He says risk management problems are typical of a banking system in which the government owns and controls all operations, including monitoring.

"We see again and again [that] those internal management and governance structures are lacking because of the ownership structure, said Mr. Song. "We don't have a shareholding structure where you can have other shareholders who can monitor the controlling shareholders. We have a dominance of the state in those banks."

The theft of huge sums from state-owned banks is a recurring problem in China. On Wednesday, a Hong Kong newspaper reported the theft of more than $65 million from Jilin Construction Bank in the province of Jilin. In that case, the proceeds of the theft were reportedly gambled away.

Major Chinese banks are also plagued with other problems, including a high ratio of non-performing loans, many of which were issued to failing state-owned enterprises. Analysts say the loan issue has been somewhat alleviated by the government's injection of $22.5 billion into Bank of China and China Construction Bank last year.

Reports this week quoted analysts as saying these problems made the banks' listing later this year unlikely. However, Bank of China officials on Monday said the bank would go on with its plans to list its shares on world markets, despite the ongoing investigation into the missing $120 million.

The Bank of China embezzlement case emerged last month when Northeast Expressway, a Shanghai transportation company, reported that $35 million of its shareholders' funds had disappeared after they were deposited in the Harbin branch.

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