Bloomberg News

Ernst & Young Retracts Report on Bad Chinese Loans

May 12, 2006

Ernst & Young retracted what it called a ``factually erroneous'' report that China's Big Four state banks had $358 billion of bad loans, almost three times higher than reported figures.

``We apologize that this erroneous report was issued,'' the company said in a statement today about the firm's May 3 study. ``We sincerely regret any misleading views that the report conveyed.''

The report didn't go through the firm's regular internal approval process and is being withdrawn, said Ernst & Young. The four lenders, Industrial & Commercial Bank of China (601398), Bank of China, China Construction Bank and Agricultural Bank of China, control more than half China's $4.7 trillion of banking assets.

``The number didn't look very compelling to China-watchers because things actually have been improving lately,'' said Dan Rosen, who runs China Strategic Advisory LLC, a New York-based China consultant. ``The methodology and assumptions at arriving at it weren't very clear either.''

Chinese banks have made the reduction of non-performing loans a priority before the market opens to foreign competition next year. China spent $60 billion in the past two years to bail out Industrial & Commercial, Bank of China and China Construction. In a March 31 report, the International Monetary Fund said the four banks lend to companies without considering their profitability.

`Ridiculous'

China's central bank yesterday called the original Ernst & Young report ``ridiculous,'' saying it distorted the asset quality of the country's banking industry. The lenders had about $134 billion of bad loans at the end of 2005, according to the nation's banking regulator.

Ernst & Young audits one of the four, the firm said in today's statement, without identifying it. The audit, carried out according international accounting standards, confirms the bank's contribution to the official non-performing loan figure, Ernst & Young said.

Charles Perkins, a spokesman at Ernst & Young's New York office, referred calls to the company's London office. London- based spokesman Kevin Russell didn't return calls seeking comment.

The People's Bank of China called for tighter credit controls last month because the lending is growing ``too fast'' and raised its one-year lending rate by 27 basis points to 5.85 percent on April 28.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

To contact the editor responsible for this story: Erik Schatzker at eschatzker@bloomberg.net.


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