TUESDAY, MARCH 05, 2002
China corporate whistle blowers play high risk game
REUTERS
BEIJING: Chinese academic Liu Shuwei did not expect to receive death threats after she queried the financial health of a blue-chip company.
But that is precisely what happened when she urged banks to reconsider lending to a company in a case highlighting the risk of being a corporate whistle-blower in China.
Liu, whose story has added significance as China pushes economic reforms as a new member of the World Trade Organisation, says she simply did what anyone else would have done.
"I am a scholar. I had a responsibility to inform the relevant government bodies of the problems I discovered," she said in an interview.
But her experience suggests China has some way to go before those who suspect corporate sharp practice can count on the high-level support accorded to whistle blowers in the West.
China has urged better corporate governance and more transparency by listed firms, but regulators are fighting an uphill battle against powerful interests.
Liu, a researcher at the prestigious Central University of Finance and Economics in the capital Beijing, blew the whistle on Hubei Lantian Co -- a producer of fish and the Chinese delicacy called lotus root.
Lantian, based in the central province of Hubei was hailed as China's first farm play when it listed in 1996.
Liu says she stumbled across problems with Lantian's balance sheet last year. Revenue seemed unusually high and the government had no record of some claimed assets.
Liu was shocked that Lantian's lenders, some of China's biggest banks, had not noticed what she had found.
She penned a brief article for publication in a secret "internal" magazine for bankers with a circulation of just 180, recommending they shut off credit to the company.
The article appeared in October and shortly afterwards Lantian's lenders -- including state giants China Construction Bank and Bank of China -- followed Liu's advice.
That's when Liu's problems began.
Liu, whose account has since been published in state media, says company officials secured her unlisted home phone number and bombarded her with calls.
In December, a court official and policeman from Honghu, Lantian's home city, arrived at her office and served her with a writ for defamation, setting a court date for January 23.
The Internal magazine, published by the central bank's Financial News newspaper, was not named in the lawsuit.
Neither the central bank nor the China Securities Regulatory Commission contacted Liu.
On her own: Liu's university treated the affair as a "personal matter". She was on her own.
The influential Caijing magazine broke the media silence in December, but, according to a Chinese journalist with knowledge of the affair, other newspapers were afraid to print anything.
Liu says she received dozens of death threats over a period of several days in January. She reported them to the police.
One e-mail read: "The 23rd is the date of your death."
Just who made the death threats remains a mystery.
But Liu, who looks every inch the academic with blue jeans, a black turtleneck and no make-up, did not wait passively despite fears for her safety and the worries of her ailing mother.
With the help of a lawyer friend, she argued for a change of venue for the court hearing and began to build her defence, arguing that any bank would have stopped lending if it had done adequate credit analysis.
"If a company's financial condition was like this, what would banks in other countries do? They would immediately take this as an early warning. They would stop lending," she says.
But China's banks aren't like banks in other countries.
Under pressure from the government, state banks often serve as cash machines for companies, causing bad loans to rise. Many firms use new loans to pay off previous borrowings from other banks since China has no unified record of credit histories.
Then, later in January, things started to change.
Lantian apologised to investors in a public announcement and said 10 officials had been questioned in an investigation into whether the company had provided false financial information.
The defamation case was postponed indefinitely.
Police say the 10 officials were held for several hours and then released pending further investigation.
But official newspapers, from the specialised China Securities Journal to the popular tabloid Beijing Youth Daily, promptly splashed the case all over their pages.
Experts said Lantian could be a test case for a new judicial decision allowing shareholders to sue companies for releasing false information.
Lantian announced in February that CITIC Industrial Bank and Minsheng Bank were suing it for non-payment of $16 million in loans after banks froze its accounts.
Shares in Lantian, which has just changed its name to Hubei Jianghu Ecology Co, have tumbled nearly 50 per cent since late September when the news of the investigation first emerged.
The case may not have had the impact that the collapse of US energy trader Enron had in the United States, but it has drawn attention to poor accounting practices in China.
"I've heard of Enron because after it went bankrupt the newspapers all had the news," Liu says of the scandal that has sent shivers through corporate America.
Liu may not be able to look forward to the sort of public hearing accorded to Enron whistle blower Sherron Watkins, who testified before the US Senate.
But she says her own crusade to improve transparency in Chinese markets and lending practices is far from over.
"We scholars hope our country can be better," she adds. "If China's enterprises and economy are handled well, this is good for the whole world."
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