One of the world’s big four accounting firms is deeply involved in China. [We used to have five until one succumbed to another tar baby, Enron] Pursuing their new role not only as bean counters but as consultants [that was one “Chinese Wall” which should not have been breached], Ernst and Young in their annual worldwide survey of bad debts, dropped a bomb.

Chinese banks, the report said, have piled up $900 billion in bad debt — almost as big as Beijing’s foreign exchange hoard. The figure doubles E&Y’s 2002 estimate, and makes official non-performing loans estimates look anemic. Furthermore, $358 billion of this resides with four large state-owned commercial banks; the rest is with assorted financial organizations including those created to unload bad debt. These latter enterprises are not working. Beijing has refused to bite the bullet of a wide-open auction as well as China’s commerical legal morass.

The report came particularly inauspiciously for Beijing since it is about to try to flog vast stock issues in the four banks on international markets, not only to raise capital, but regulators say, to force international standards on the notoriously inefficient institutions. There are almost monthly embezzlement scandals in China’s banks, never mind the under the counter lending. And China’s runaway economic boom is powered by unvetted politically motivated virtually unlimited lending – again, generated in no small by counterpart funds of its growing foreign exchange reserves. E&Y found while the percentage of NPL might have decreased, because of the huge lending volume the absolute sum was growing.

Within days after Chinese authorities denounced the report as “ridiculous”, E&Y withdrew it. The Financial Times pointed out E&Y’s conclusions were hardly news to financial cognoscenti. Another accounting firm and the International Monetary Fund had come to the same conclusions. The FT said the mea culpa was less about Ber Rabbit and more about the tar baby. “E&Y’s defence is that the $358 billion headline number proved insupportable and ‘factually erroneous’.” If so, what does that say about an accounting firm? It’s also recalled E&Y is auditor of one of the big four Chinese banks.

But it’s not just businessmen who are finding China sticky. American admirals from the Pacific Command have had a particularly difficult time dealing with the Chinese tar baby. One advocated a “strategic engagement” during the Clinton Administration. Another, a post-retirement U.S. ambassador, was surprised when after a Chinese fighter collided with an American surveillance aircraft in international waters off China in 2001, his phone calls to “old friends” in the Chinese military were not returned.

Now, another Pearl Harbor commander, shorn by Washington of the old title of CinCPac [there is only one commander in chief, the Rumsfeld Pentagon has reminder regional chiefs], is getting stuck. According to press reports, Adm. William Fallon, the current commander, U.S.. Pacific forces, said after weeklong talks in Beijing about his Chinese hosts, "They're looking for constructive engagement and so am I….Now that we've agreed to the principle, let's move on the details."

Not only is the devil in the details, but as Secretary Rumsfeld pointed out so cogently last year in Singapore: who is the enemy of a Chinese armament program, three or four times larger than publicly announced? For a decade Beijing has announced double-digit spending increases for the 2.3 million-member People’s Liberation Army, the world's largest. It has purchased Russian submarines, fighter jets and other high-tech weaponry. And it has pointed hundreds of missiles at Taiwan.

Fallon told the media he asked Chinese commanders to help build a "track record of confidence" so he could lobby Congress to ease legal restrictions on military contacts. A 2000 law limits U.S. military to humanitarian, disaster relief and other non-warfare.conact. Fallon said he invited Chinese officers to watch the Guam exercises from a U.S. warship on June 17-19. Fallon said he reminded his hosts of the extensive Chinese-Russian war games — including amphibious landings — last year on China;s east coast to which neither the U.S. nor anyone else was invited

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" ‘Did the fox eat the rabbit?"’ asked the little boy to whom the story had been told. ‘Dat's all de fur de tale goes,’ replied the old man. ‘He mout, an den agin he moutent. Some say Judge B'ar come 'long en loosed 'im — some say he didn't. I hear Miss Sally callin'. You better run 'long.’.”

Sol W. Sanders, (solsanders@cox.net), is an Asian specialist with more than 25 years in the region, and a former correspondent for Business Week, U.S. News & World Report and United Press International. He writes weekly for World Tribune.com and East-Asia-Intel.com.