Can China be trusted?

How can the AMCs write off debt?

The Central Bank created the AMCs as warehousing organisations to acquire non-performing loans and assets from the four state banks in preparation for their initial public offerings (IPOs). The NPLs were "purchased" at full book value, paid for in part with cash loans from the Central Bank, plus 10-year bonds carrying 2.25 per cent per annum interest issued by the AMCs. The Central Bank also guaranteed the bonds to relieve the banks from further risk. The AMCs have no assets, but do have substantial unrecorded operating costs, the funding source unknown.

The only entity with the capacity to write off NPL related liability is the Central Bank itself.

A 2009 CBRC report stated that the AMCs were profitable. Then in June 20 2010, the CBRC revealed that the AMCs were insolvent and that Bank of China's AMC (China Orient) was unable to meet its bills due June 30, 2010.

State secrets

Another classic example of information concealment is the immediate deletion from internet notice boards of comments on currency losses on the foreign exchange reserves by the Ministry of Public Security, the operator of China's Great Firewall and part of the Central Propaganda Department network.

Then there is the information catchall of the State Secrets legislation that gives information any meaning that Beijing may wish. All information relating to the finances of state-owned enterprises, including the financial institutions and China’s economy as a whole, fall within the State Secrets net and require approval from Beijing prior to publication.

Ernst & Young was one high profile foreign entity that apparently experienced Beijing's wrath following the release of their 2006 Report on China's national debt. The report revealed that that exposure to NPLs by the four state banks seeking listing at the time of the report was US$911 billion, double official data and equal to 40 per cent of GDP. Under pressure from Beijing, Ernst & Young withdrew the report and publicly apologised, but released no details.

World Bank was also subjected to similar pressure following the compilation of their 2007 report, "Cost of Pollution in China", that revealed the extent of pollution related mortalities in China each year. Beijing rejected the report and World Bank reduced the numbers to 750,000 pollution related annual mortalities. Beijing also demanded the removal of the map identifying the related villages and provinces.

China's future

Regardless of the spin from China, John Garnaut's articles send clear warnings to Canberra and other nation's capitals to treat data from China with the credibility it deserves.

Australia may also be prepared to revise the anticipated windfall revenues from the new Minerals Resources Rent Tax, and its projected return to surplus.