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To: Alex who wrote (22481)	11/1/1998 9:24:00 PM
From: goldsnow	Read Replies (2) \| Respond to of 116756

Bad China Loans Could Mean Trouble Sunday, 1 November 1998 H O N G K O N G (AP) THEY FUNDED China's drive toward modernization, building power plants, new roads and flashy real estate developments touted as the pride and glory of provincial governments. But the plants are generating more electricity than the market needs, the roads have only a handful of drivers on them and the properties have few tenants. It all adds up to a financial nightmare for the companies who lent money on the projects. They're struggling with billions of dollars in foreign debt, and one big one has been closed by the central government, an admission that it went bust by ill-fated attempts to build up China's infrastructure. The plight of China's non-bank financial institutions, known as international trust and investment corporations, or Itics, has rattled investor sentiment in a region already fighting to bounce back from its economic crisis. And some analysts warn that the troubles are just the beginning, with problems in Chinese banks likely to emerge next. "Itics are in worse shape than banks, but banks are not in good shape either," said Andy Xie, a Hong Kong-based economist who follows China for the Wall Street investment bank Morgan Stanley. Soon China will have to address not only its non-bank financial institutions, which make up 3 percent of the financial system, but the banks themselves, Xie predicted. For now, concerns have centered on China's 240 Itics, which act largely as provincial government investment arms. They are run mainly by politicians, rather than financial professionals. Many of them secured foreign funding for provincial government projects, using the official backing to gain the trust of foreign bankers. But critics say many of the Itic projects were developed not because they were financially viable, but because they reflected the demands of government officials who were more concerned about having impressive developments in their territories. Investors now nervously wonder whether that official backing will lead to public cash being used to pay off the bad loans or whether they'll have to take the losses. Earlier this month, China's central bank stunned the financial world by abruptly ordering the closure of the debt-laden Guangdong International Trust and Investment Corp. The closure was largely seen as a part of Premier Zhu Rongji's reform program, which includes cracking down on corruption and unhealthy financial dealings. The company is now in the hands of liquidators, and it remains unclear whether it can repay debts that are reported at $2 billion. Gitic executives did not return repeated phone calls from The Associated Press. Economists have lauded China's decision to shut Gitic as a step toward sound financial management. But analysts say foreign banks could lose money they invested and a credit crunch could worsen as investor confidence is shattered, making it difficult and expensive even for sound Chinese companies to obtain loans. "What I'm worried about is the likely result of how foreign banks see the nature of guaranteed loans," said banking analyst Raymond Lee at Salomon Smith Barney. While China could repay the Itics' foreign debt with the country's massive foreign reserves of more than $140 billion, that could undermine Beijing's resolve to clean up the financial sector. "The government has the resources to bail them out, but it cannot," Xie said in a telephone interview. Any government bailout would basically be sanctioning unsound financial decisions, the economist said. Exactly how much foreign debt the Itics have is unclear. Part of the reason Gitic was shut down and others are on review is that they circumvented the State Administration for Foreign Exchange, China's official channel for registering foreign loans, by borrowing money through subsidiaries, mostly in Hong Kong. That means that both the Itics and the banks are responsible for the risky lending, economists say.