Behind the Bailouts.(Chinese finance)

It was an expensive week. First Beijing dropped almost $1 billion to rescue the country's fifth largest brokerage. Then a few days later the government plunked down $45 billion to help wipe bad loans off the books of two of its biggest banks. These were not acts of state charity. China is spending money to make money, by encouraging the foreign euphoria for mainland stocks. Qu Hongbin, senior China economist with banking giant HSBC, says: "We are living in a period of China fever. People tend to ignore the negative things very easily."

The bailouts were timed to reassure foreign investors who are lining up to buy into China's murky financial industry, even before it's clear just what is for sale. Under its agreement to join the World Trade Organization, China is opening banks, brokerages and insurance companies to foreign investors for the first time. When China Life Insurance went public last month, it put $3 billion in shares on sale, and got offers for $80 billion. In New York or London one can go to a Web site to check upcoming IPOs, but in China one goes to the rumor mill, which foresees as many as 100 IPOs in 2004. Prominent on that guess list are two companies Beijing bailed out last week: the Bank of China and China Construction Bank. Steven Irvine, editor of specialist publication Finance Asia, says, "The consensus is this will be a very big year for China issuance, though how big no one knows."

The financial industry remains one of the most rotten sectors of the Chinese economy. By official count, Chinese banks hold at least $422 billion in nonperforming loans, mostly to state enterprises with little prospect of repaying. The new $45 billion bailout will be shared equally by the Bank of China and China Construction Bank to help prepare their books for listing. The conventional wisdom in the markets is that the state will use cash from those sales to shore up other banks so they, too, can find foreign buyers for their shares.

The sketchy story of China Southern Securities illustrates perfectly the opaque nature of Chinese finance. The private securities firm had been in joint-venture talks with Goldman Sachs and HSBC before Jan. 3, when Chinese market journals announced out of the blue that government regulators and the Shenzhen municipal government would take over Southern Securities, following the discovery of what market officials called "illegal and irregular operations, and disorderly management." After revelations that the firm would be kept open with a $966 million bailout, the story died for lack of any further ...