In China, though, the firm has been stitched up pretty brutally over its report on the country’s dire non-performing loan (NPL) situation. E&Y estimated that China’s total NPLs for all financial institutions came to about US$911 billion, a fat figure which at the time of release was embarrassingly even higher than the country’s massive foreign exchanges reserves.
Such figures are designed to attract headlines, and the report did just that, being splashed onto the front pages of the global financial press during the first week of May. Officials at the People’s Bank of China (PBOC), who should have been enjoying their May Day break that week, were furious.
E&Y quickly withdrew the report and issued not only a corporate apology, but also a personal one from its author, the normally ebullient Jack Rodman. Perhaps Mr Rodman thought that his headline-catching report would be good for business. It might have forced the country’s bad-debt disposal companies to do what they had been set up to do – and have so far largely failed to do – namely dispose of bad debts. And E&Y would help with this, of course.
The more interesting question now is whether E&Y’s business will suffer in the wake of the debacle. In all likelihood, it will, even if only in a symbolic sense, to remind foreign companies who’s in charge in the middle kingdom.
E&Y would not be the first to suffer. BHP Billiton, the world’s largest mining company, was punished for insisting on a special freight levy for iron ore transportation last year. Nothing wrong with that, you might think, except that the Australian mining company had already won a 71.5% increase in price in 2005. Asking for even more seemed like a case of bad manners, not to say poor timing.
Goldman Sachs also got a little greedy by insisting it be allowed to underwrite the overseas listing of Industrial and Commercial Bank of China (ICBC) this year, on top of the one for Bank of China. ICBC, whose bosses had been duchessed by Goldman during a trip to New York, favoured the bulge-bracket bank, but Politburo leaders decided otherwise.
Mr Rodman himself has been a firm favorite of Beijing’s bankers in the past. After all, using every trick in his salesman’s book, he helped launch the initial road shows selling Chinese NPLs in the early part of this century.
Fat Dragon himself attended a few such shows back then and can testify to Jack’s pizzazz, stalking the stage, microphone in hand, like a televangelist, extolling what he called the opportunity of a century. Nobody has ever made a bankrupt cement factory in Anhui sound so good.
To be fair to the PBOC mandarins, they did not just stomp on Mr Rodman’s report because they don’t like bad news. The E&Y report had its flaws. It lumped past, present and speculative estimates of future NPLs all into the one pot, which most respectable economists would not do. And it also suffered from a touch of double-counting.
But its essential point – that China’s lending binge of the last few years was accumulating a new stack of bad loans on the books of not just the Big Four state banks but also other institutions – is undoubtedly right.
You needn’t just take Fat Dragon’s word for this. PwC and the McKinsey Global Institute both produced reports about the same time as the E&Y tome saying basically the same thing. But PwC and McKinsey were a little more politically savvy than E&Y – they didn’t offer up a headline by providing a figure for new bad loans, which ensured that they got less publicity.
So just as China had to keep buying BHP’s iron ore – its steel industry would have had to shut its doors otherwise – and Goldman Sachs will continue to win its fair share of banking and finance deals – Mr Rodman might yet be invited back into China to sell bad debts again as well.
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