Enron trouble puts attention on Chinese finance tricks

BEIJING -- For China, the greatest surprise from the collapses of Enron, Global Crossing and other business giants was not that it happened, but that it didn't happen here first.

Chinese companies routinely use accounting tricks to hide debt, inflate profits and evade taxes -- often at the expense of investors. Government officials say such tactics threaten the health of the nation's financial markets as they open to foreign competition under the rules of the World Trade Organization, which China joined in December.

"Enron's being talked about a lot -- the need for better financial supervision, better corporate governance. It's a lesson for the Chinese government as well," said Justin Yifu Lin, a government adviser who heads the China Center for Economic Research at Peking University.

Spurred by WTO requirements, stock market scandals and rising public anger, Chinese regulators are seeking to clean up the corporate financial system with tighter controls and a fresh crackdown on errant companies.

Asian mirages

The Asian financial crisis of the late 1990s showed that the region's economic miracles were in part mirages, undermined by corrupt corporate empires once viewed as engines of extraordinary growth. Despite repeated crackdowns, that lesson has yet to take hold in China, which faces the biggest corruption problems in Asia, says Transparency International, which monitors governance around the world.

State media reports say more than 175,000 officials were investigated for corruption in 2001, up 30 percent from the previous year.

Much as in the Enron case, many Chinese companies caught cooking the books or involved in illegal activities were once considered model performers by investors and analysts.

Concepts of corporate disclosure and accountability are alien for many Chinese companies bred in an era of central planning and government control. Even though China has enacted fairly stringent disclosure requirements, the information being released often does not reflect reality.

"We all know that the Chinese stock market has a lot of very troubled companies that are propped up by helium," said Jim McGregor, a Beijing-based consultant and former venture capitalist. "You think Enron is bad? You should see some of the companies here."

In one of the most egregious cases, the China Securities Regulatory Commission found last summer that major shareholders in Sanjiu Medical Pharmaceutical Ltd., which is listed on the Shenzhen Stock Exchange, had misappropriated $302 million -- nearly all the company's assets.

The unit of giant drug maker Sanjiu Enterprises Group issued a public apology and pleaded to errant shareholders to return funds stolen through illicit dealings.

Another regulatory probe found that outside auditors signed off on false export and production figures and financial information for Guangxia Yinchuan Industry Co., a Shenzhen-listed maker of chemicals, drugs, herbal medicines and wines in northwestern China's Ningxia region.

The Ministry of Finance canceled the license of Guangxia's auditor, Zhongtianqin, which is a national accounting firm based in Shenzhen, across the border from Hong Kong.

Worst cases

Some of the worst cases have been in the financial sector.

Last month, the China Securities Regulatory Commission publicly censured a fund management company, Boshi Fund Management, for stock price manipulation. Eight of 10 other fund management companies also investigated were involved in similar activities, regulators found.

The disclosure by U.S. regulators last month of shady dealings at the state-run Bank of China was followed by reports that China Minsheng Bank, the country's only private bank, was investigating officials for fraudulent loans worth $43 million.