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in 2003, internal auditing staff in Chinese banks accounted for only 1 percent of the bank employees, compared with 5 percent in Western banks.104 Accountability has rarely been enforced. In a survey of bank employees in 2002, 20 percent reported that absolutely no action was taken even when mistakes that resulted in bad loans were discovered; 46 percent said “no efforts are made to uncover bad loans, so people [responsible for making bad loans] are not held accountable.”105 Researchers have documented systematic looting and abuse by insiders in the banking sector in the 1980s and 1990s.106 A large number of senior bank executives, including the presidents of BOC and CCB, have been jailed for corruption. In 2003 and 2004, four of the five most senior executives of BOC’s Hong Kong subsidiary, including its president, Liu Jinbao, were arrested on corruption charges. Government investigators found that the funds Liu stole from the bank, as well as the bribes he had accepted, exceeded 41 million yuan. 107 In the worst case of insider looting, managers at a BOC branch in Kaiping, Guangdong, stole $483 million from 1997 to 2002.108

The amount of money involved in uncovered corruption cases in the banking system has often been staggering. Audits conducted by the National Audit Administration in 1999 uncovered 400 billion yuan in misused funds at 4,600 branches of the ICBC and 1,700 branches of the CCB.109 A separate audit of the Agricultural Development Bank (ADB) in 2001 revealed that between 1995 and 2000, the head office of the ADB used illegal means to siphon off 57 million yuan to cover questionable administrative expenses. In addition, from 1996 to 1999, the ADB illegally appropriated 800 million yuan in stock speculation, with profits pocketed by the insiders. In its audit of the Guangzhou branch of the CCB in 2002, the National Audit Administration found pervasive corrupt practices and irregularities, such as the concealment of income, fraudulent accounting, hidden slush funds, and fraudulent issuance of loans.110 Poor governance, corruption, and irregularities appear to have contributed to the issuance of a large number of risky loans, particularly to real estate developers. In its inspection of bank loans in 2002, PBOC found that, of the 146.8 billion yuan in real estate loans issued by banks from June 2001 to September 2002, two thousand loans worth 35 billion yuan (25 percent of the total amount reviewed) were made in violation of regulations.111

A landmark study by two of China’s leading financial economists in 2002-2003 documented the magnitude of corruption in China’s banking system. The director of research at the PBOC, Xie Ping, and his colleague, Lu Lei, surveyed 3,561 bank employees, enterprise managers, farmers, and private entrepreneurs in twenty-nine cities in 2002.112 In response to their question on whether “financial institutions use their power of credit/capital allocation to engage in corrupt transactions,” 37 percent of the respondents thought such a practice was “prevalent” and an additional 45.2 percent believe it was “quite often.” Forty-five percent also said that they must “give some goodies” as “extra costs of obtaining credit.”113 On average, firms had to pay bribes equal to 3.9 percent of the loan amount to obtain bank credit and offer an additional 4.9 percent in maintaining relationships with the banks. For individual farmers, they must pay 5.9 percent of the loan amount to get credit and 2.9 percent to keep the relationship.

It is worth noting that the extra costs of borrowing (bribery) for firms were exactly identical to those paid by individual farmers—8.8 percent of the loan amount to get credit and maintain access to bank lending. Levied on top of the nominal official rates, this “bribery premium” of 8.8 percent brought real interest rates of loans from banks close to the rates on the private credit market (the curb market rate was about 10 percent above the official rate). This implies that the true cost of credit was high for Chinese firms and farmers, even though bank insiders captured