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Monday, October 26, 1998 Published at 11:30 GMT

Business: The Economy

China warns on foreign loans

Shanghai's expansion has been financed with foreign money

The Chinese government has warned foreign banks that it will not rescue its failing financial institutions.

The warning follows the bankruptcy of one of the biggest vehicles for foreign investment in China, the Guangdong International Trust and Investment Corporation (GITIC).

Xiang Huaicheng, China's finance minister, said that the move was a warning to investors and foreign bankers.

"Before you provide these loans you should study Chinese law very carefully," he said.

There are more than 100 ITICs in China, and many more are believed to be in financial difficulty.

Most have been set up by provincial governments eager to raise international finance to pay for infrastructure projects.

But they have been accused of evading restrictions on foreign borrowing by the central authorities who are now determined to crack down on the excesses of the financial sector.

Mr Xiang added: "We are giving a big warning to all the international trust and investment companies across the provinces to say that before you start raising loans abroad you should be very cautious."

Credit crunch coming?

The tough line by Beijing could cause a sharp pullback in foreign lending to China. Many foreign banks, who have lent more than $10bn to the ITICs, believed the debt was underwritten by the central government.

Another big investment trust, the Shenzhen International Trust and Investment Corporation, said at the weekend that it was having difficulty raising funds.

In the case of GITIC, the Bank of China has taken over its assets and liabilities - but it is refusing to honour obligations to international creditors, whose loans were guaranteed by the provincial government.

The Chinese finance minister made it clear that local government was wrong to make such promises.

"Local government does not have the qualifications or resources to guarantee such loans," Mr Xiang said.

The financial shake-out could be to the long-term benefit of China, which is facing up early to the kind of bad debt problems that have crippled other Asian economies.

But it will be painful for Western investors. The government is clearly expecting other ITICs to fail.

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