This was pieced together from CNN and NYT articles.
On October 6, 1998, China's central bank stunned the financial world by abruptly ordering the closure of Guangdong International Trust and Investment Corp. (GITIC). Although debt problems plagued Guangdong International, the nation's second-largest trust and investment company behind the China International Trust and Investment Corp., what surprised economists and bankers is that the government decided to take decisive action against such a well-known institution.
Guangdong International's demise was prompted in part, bankers say, by the way lending from Japanese and South Korean banks dried up this year as the financial situation in those nations weakened. Foreign lending to trust and investment companies has been declining all year and is now virtually nonexistent.
The closure was largely seen as a part of Premier Zhu Rongji's reform program that includes cracking down on corruption and unhealthy financial dealings. The company is now in the hands of liquidators, and it remains unclear whether it can repay debts that are reported at $2 billion.
The closing signaled a shift away from largely outdated trust company financing -- created in the days when Chinese banks offered limited financial services -- and toward a more modern financial system built around banks and capital markets.
Taking the long view, economists have lauded China's decision to shut GITIC as a step in the direction of sound financial management. But in the short term, analysts are watching the situation nervously. They say foreign banks could lose the money they invested, and a credit crunch could worsen as investor confidence is shattered, making it difficult and expensive even for sound Chinese companies to obtain loans.
Until now, it had been virtually inconceivable for Beijing to close a prestigious investment company like Guangdong International. In the past, state-run companies with good connections to the central government have generally been able to rely on bailouts, often based on endless debt restructuring. But Beijing's leaders have been alarmed at the crisis facing several Asian neighbors, which have been swamped by the same kind of financial overexposure that plagues many Chinese financial institutions. Although China has so far been spared the worst of Asia's crisis, officials in Beijing have said they intend to make China's notoriously debt-ridden banks and investment companies more accountable.
While China could repay the ITIC international debts with the country's massive foreign reserves of more than $140 billion, that could undermine Beijing's resolve to clean up the financial sector.
On December 16, 1998, Goldman, Sachs & Co. announced that it would enter a partnership with the government of Guangdong Province in southern China to help rescue one of the region's biggest state-owned companies.
Guangdong said it had hired Goldman as a financial adviser. It is the first instance of a foreign investment bank's working for a provincial government in China. Goldman also said it would buy a $20 million stake in Guangdong Enterprises Holdings, a state-owned investment conglomerate based in Hong Kong, once the restructuring is complete in six to eight months.
The deal comes at a critical if muddled time in China's slow-going financial reform. Frightened by Asia's economic crisis, leaders in Beijing have lost their enthusiasm for fast reform of their currency and stock markets. Still, China is proceeding with an overhaul of its troubled banks and investment companies, seeking to clear up mountains of bad debt before serious problems, like those seen elsewhere in Asia, firstname.lastname@example.org