Chang: Bank of China sale faces delay


Hong Kong is a sick society, but China faces a bank run of mammoth proportions, according to Chang

By Alex Frew McMillan

HONG KONG, China -- Problems at the Bank of China will delay the public sale of its Hong Kong branch, according to controversial author and lawyer Gordon Chang.

Officials at the Bank of China say they are preparing an initial public offering (IPO) of its stock. Market expectations are for it happen later this year, but the bank will not discuss a timetable.

"I will be astounded if they go ahead with the Bank of China IPO before they settle what happened in Kaiping, because the money came out through Hong Kong," Chang told CNN.

Chang said he was taken aback by the size of the money allegedly embezzled from the Bank of China's branch in the city of Kaiping, in Guangdong province adjoining Hong Kong.

No comment

Authorities said $431 million went missing, though initial suggestions were that as much as 6 billion yuan ($725 million) had vanished (Full Story).

The Bank of China has declined to comment on details of its offering.


Chang is perhaps best-known as the author of a book illustrating China's failings

Chang spoke this week in CNN's Hong Kong offices. He was en route to Singapore, where he is to address government officials on China.

The U.S.-based writer practiced law in Hong Kong for a decade.

Chang said the Kaiping case is symptomatic of widespread problems in the banking system. He attributes the problem to the state-owned enterprises that China has long attempted to reform.

"Chinese banks every now and then see a bank run," Chang told CNN. "Every time Chinese officials have to ship in money, though the reason is different."

Bank runs not the root cause

But those dramatic runs ignore the root cause, according to the writer. Chang is perhaps best-known for his book "The Coming Collapse of China," out last year.

"You can transfer money into the Big Four [banks] but that's not the problem," Chang said. "It's not an issue of money. It's the failure of the reform system."

Chang believes China is moving toward a debt crisis. "The 2000 deficit was a record for the People's Republic, but that honor will not last long," he said in a recent speech to U.S. legislators.

In dollar terms, China's deficit dropped to $29.9 billion in 2001, from $30.1 billion in 2000. But China's national public debt is a little over 150 percent of its total revenues, Chang believes.

China's Big Four banks were recapitalized in 1998. But to some critics, that only delayed the lack of reform.

"The problem is that the state has yet to recognize the failings of the state-owned enterprise system, and they have yet to reform the banking system," he added.

"China, even to this day, maintains a system whereby the state owns and operates the major actors in the economy," Chang said in his report. The problem remains as long as the state-owned system is not reformed, he told CNN.

'Hong Kong is a sick society'


The bank scandal is merely a sign of deeper problems with the national credit system, Chang said

Chang also foresees serious social problems for Hong Kong. China's World Trade Organization entry -- though touted as a blessing -- likely means the former British colony's downfall, he said.

"Hong Kong is a sick society, you can see it from the suicide rate," Chang said of his long-time base. Amid a serious economic downturn, the suicide rate is widely believed to be at an historic high.

Pressures should ease as the U.S. dollar weakens. The Hong Kong dollar is pegged to the U.S. dollar, leaving goods and services here much more highly priced.

The dollar is weakening rapidly against the Japanese yen and Korean won. Japanese officials intervened with a warning on Friday, arresting the yen's run. It now stands at 123.10 to the dollar in afternoon trade in Hong Kong.