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Foreign firms treading carefully
With alarming docility, foreign companies in China have agreed one after the other to restrict free speech if that is what it takes to do business in the world's most populous country.
- By Victor Mallett, Financial Times
- Published: 00:00 May 25, 2006
With alarming docility, foreign companies in China have agreed one after the other to restrict free speech if that is what it takes to do business in the world's most populous country. Internet companies, because their business is communications, are more implicated than manufacturers or bankers.
Yahoo has provided details that helped the Chinese authorities jail two dissidents.
Google has launched a special Chinese service that restricts search results for sensitive topics such as human rights. The companies concerned say they are obliged by law to stifle dissident political views.
Companies in other sectors claim to be unaffected. But what if Beijing's interference were to extend to the suppression of the economic and financial information on which investors rely to make business decisions?
Would executives in China feel as sanguine as they do today about curbs on free speech?
The publication and humiliating withdrawal of Ernst & Young's global report on non-performing loans this month serves as a warning that open discussion of the economy especially politically sensitive matters such as the health of the big banks is, in fact, already compromised. In China, as elsewhere, it is impossible to make a neat distinction between economic and political news. Corrupt local governments have a history of producing unreliable economic data and hiding fraud and incompetence at state-run companies and banks from public scrutiny.
No one should therefore be surprised if the consultants and financial institutions that might spread uncomfortable economic news come under the same kind of pressure as internet companies used as platforms by political activists.
In the China section of its report on May 3, E&Y estimated the total exposure of China's financial system to bad loans to be $911 billion. That included $358 billion nearly three times the official figure at the big four state banks.
Nine days later, E&Y withdrew the whole report, saying the $358 billion figure was "factually erroneous" and lamenting the absence of the "normal internal review and approval process" before publication.
E&Y's explanation is hard to swallow, if only because it suggests the organisation was unusually incompetent at its work as well as unusually lax with its controls.
A more likely reason is that E&Y is trying to protect its China business and mollify the People's Bank of China, the central bank, which had publicly called the report "ridiculous and barely understandable" hours before E&Y backed down.
Beijing which is seeking to ensure a smooth initial public offering this week for Bank of China, one of the big four did identify a specific problem with the E&Y report, namely that it was inconsistent with E&Y's own auditing of Industrial and Commercial Bank of China, another big four bank.
That is indeed embarrassing for E&Y, since it exposes the conflicts of interest that arise when the same group is simultaneously the auditor of a particular company and the provider of financial analysis to a broader clientele in its role as consultant.
E&Y's report on China, however, was carefully worded. It noted the scarcity of accurate information in "a banking culture that resists openness" and referred to bad loans that could lurk in the category of "special mention" credits not included in official non-performing loan ratios.
It should not be forgotten that E&Y described its $911 billion estimate as "conservative" or that its concerns (although not the exact numbers) are shared by PwC, McKinsey Global Institute and the International Monetary Fund.
Much more is at stake than the fate of the state banks, although it is easy to see signs of frenzied over-investment in property and infrastructure financed by the banks in China's big cities.
The underlying problem is Beijing's determination to curb the free flow of awkward information. That will ultimately threaten China's economic modernisation as well as its political development.
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