Global Policy Forum

By David Barboza

China has been shaken by a series of large-scale bank robberies in recent years, but they are not the Bonnie-and-Clyde type. These are inside jobs: top executives, branch managers, loan officers and thousands of everyday employees have been running off with billions in customers' money. Consider what has happened in just the first two months of 2005. First, a branch manager at the Bank of China disappeared with more than $100 million in cash. A few weeks later, dozens of employees of another commercial bank were arrested for conspiring to steal nearly $1 billion. And then midlevel officials of the China Construction Bank fled with about $8 million.

There is no word yet whether any of the money has been recovered. But the chain of events underlines an ugly byproduct of China's aggressive embrace of a freewheeling, get-rich-quick form of capitalism: a long-running wave of corporate and government corruption scandals. The financial scandal watch gained new prominence last week with news reports that Zhang Enzhao, the head of the China Construction Bank, resigned after a lawsuit accused him of having accepted a $1 million bribe from an American company, Alltel Information Services. The bank later issued a statement saying he resigned for "personal reasons."

The scandals are by no means limited to banks. Since the early 1990's, China's modern robber barons have focused on all manner of state-run companies. Brokerage houses, government-controlled investment management firms and dozens of state-owned companies have been looted of billions, according to government investigators. The official media are filled with accounts of executives and public employees accused of embezzling money and sometimes gambling away those funds at border casinos.

With China awash in speculative money intended to fuel its economic boom, many corporate executives have turned greedy, and even low-level employees are engaging in self-dealing transactions and learning how to funnel millions of dollars into offshore accounts. "Corruption is pervasive in China," said Larry Lang, a professor of finance at the Chinese University of Hong Kong. "A lot of state-owned companies have been simply stripped clean."

Few experts say that the scandals will slow China's roaring economic growth anytime soon. But economists and government officials worry that the glaring examples of fraud, bribery and embezzlement could badly hinder the development of the nation's banking and financial systems, which desperately need to be modernized for China to become a full-fledged economic superpower.

In the last four years, at least 25 government officials have been sentenced to death for accepting bribes and kickbacks. Hundreds more are serving lengthy prison terms. But every month, the number of fraud cases seems to mushroom. Two weeks ago, the government announced that 58,000 people had been punished for misappropriating money or making unauthorized loans at just two of the big four state-owned banks. In 2003 alone, officials said that the equivalent of nearly $8 billion was pilfered from state-owned enterprises.

In many ways, the corruption scandals offer a telling glimpse into the darker side of China's remarkable ascent. Though the economy is soaring, incomes are rising (per-capita income grew to $1,100 in 2003, the last year figures are available) and foreign investment continues to flood into the coastal provinces, China's finances are in a mess. The benchmark Shanghai stock index is down about 40 percent over the last four years. Nearly half the nation's 130 brokerage houses are insolvent. And the biggest banks are weighed down by enormous debts.

"The financing system that supports China's economic growth is very fragile," said Sun Lijian, a professor at Fudan University in Shanghai. "People are often impressed by the look of cities like Beijing and Shanghai, or with the G.D.P. growth every year. But without a strong financing system, China's economic growth is unhealthy." Experts say that weak regulation and oversight, deep-seated government corruption and poor risk-management practices are to blame for allowing fraud artists and looters to run off long before investigators discover that anything is amiss.

"The incompleteness of the legal system provides an environment in which some people are willing and able to take chances to do illegal things," said Zhou Chunsheng, a Beijing University professor. One industry plagued by scandal is also the one that holds everyone's cash: the state-run banks, which had bad loans valued around $204 billion last year, according to McKinsey & Company, the consultants.

Part of this results from greed at the top. In recent years, two high-ranking executives who worked at the Bank of China were sentenced to long prison terms for economic crimes. And in 2002, the Bank of China discovered that $500 million was missing from accounts after three of its bankers fled the country. Hoping to prepare for foreign competition, some of the largest banks are trying to revamp their operations and tighten controls. The government helped by dipping into its huge foreign currency reserves last year to wipe out some $22.5 billion in bad loans at the Bank of China and the China Construction Bank.

Some of the worst-performing loans were taken over by state asset management companies. But they, too, are in trouble. In January, the government said four big state-run asset management companies engaged in illegal practices that involved $800 million. Brokerage firms are in worse shape, with at least $20 billion in debt on their books. Many were poorly managed and undercapitalized when they began dealing in shares for investors in the 1990's, experts say. But for a while, those problems were masked by rising stock prices.

When prices began to fall in 2001, a lot of brokerage houses ran aground - accused of gambling with investors' funds, investing in pet real estate projects that devoured money, and siphoning off large amounts into private or offshore accounts. With lawsuits piling up, more than a dozen brokerage firms have been seized by regulators in the last two years.

Part of the problem, experts say, is the poor state of the stock markets, which many liken to casinos. The Shanghai and Shenzhen stock exchanges, where 1,300 companies are listed, most state-run, are just over a decade old. Traders and experts complain about ineffective regulations, trading restrictions, a lack of transparency with listed companies and a disconnection between corporate profits and stock prices. "Here, earnings are irrelevant," said Song Fengming, a professor at Qinghua University in Beijing. "Even if the performance is the worst, the stock price can still go up. And vice versa. Investors think the market is an A.T.M. machine."

In the last year, regulators have pressed hard to shore up the flagging stock market. Nonetheless, over the last four years, the Shanghai Stock Exchange has the worst-performing major stock index in the world. That the economy could be sizzling hot and the market sharply lower during much of the last few years is an oddity not lost on industry officials or small investors.

"Why is G.D.P. going up and the stock market going down?" asked an official at Gold State Securities who insisted on being identified only as Li. "That's why investors won't come here." Few investors seem to trust public companies created out of state enterprises. In one of the latest examples of fraud, three senior executives, including the chairman and chief financial officer at the Yili Corporation, a big dairy company, were arrested on suspicion that they had embezzled $50 million.

Can fraud here compare to cases in the United States, like those of Enron or WorldCom? The American companies were bigger, but analysts say that corporate fraud in China is far more routine and pervasive than in the West. "The concept of an arm's-length transaction or arm's-length dealings are relatively new concepts in China," said Chen Zhiwu, a finance professor at the Yale School of Management.

According to a study conducted by Beijing University, about 16 percent of the companies listed on the Shanghai and Shenzhen exchanges over the last decade were subjected enforcement actions like fines or trading suspensions compared with 2 percent in the United States. Professor Song at Qinghua University said he abandoned a research project with Standard & Poor's to rate state-owned companies because so many financial statements were not believable. Until that changes, China will find it tough to join the economic front ranks. "If China doesn't have a strong and stable financial system," said Din Jianping at the Shanghai University of Finance and Economics, "the economy of the entire country won't be very stable."